Goldman Sachs, drawing conclusions from its research over the past decade, believes that household and business inflation expectations are primarily determined by their own past inflation experiences, with the Fed's communication itself having a limited anchoring effect.
In a 2018 survey, respondents on average believed the Fed's inflation target was above 8%; by 2025, the average estimate in similar surveys had fallen to slightly above 3%. Goldman Sachs argues that this indicates the public pays significantly more attention to the Fed during periods of high inflation, but this attention alone is insufficient to anchor inflation expectations.
The research's average results show that a 1 percentage point increase in actual inflation leads to a 13 basis point increase in long-term household inflation expectations and a 9 basis point increase in long-term individual inflation expectations. This suggests that residents only significantly increase their attention to monetary policy during periods of high inflation, at which point high actual inflation itself outweighs the impact of policy communication.
(Whether the Fed can mitigate inflation expectations in the future still depends more on a sustained decline in core and aggregate inflation. If actual inflation stickiness persists, hawkish communication alone will hardly be enough to completely offset it.)
