the fact that these survey measures
appear to have remained anchored at
about the same levels that prevailed
prior to the recession suggests that
once the economy has returned to full
employment and absent any other shocks
core inflation should return to its
pre-recession average level of about 2%
this conclusion is tempered somewhat by
recent movements in longer run inflation
compensation which in principle could
reflect changes in investors
expectations for long-run inflation this
measure is now noticeably lower than in
the years just prior to the financial
crisis however movements and inflation
compensation are difficult to interpret
because they can be driven by factors
that are unique to financial markets
such as movements and liquidity your
risk premiums as well as by changes in
expected inflation indeed empirical work
that attempts to control for these
factors suggest that the long-run
inflation expectations embedded in asset
prices have in fact moved down
relatively little over the past decade
nevertheless the decline in inflation
compensation that's the red line over
the past year may indicate that
financial market participants now see an
increased risk of very low inflation
persisting although the evidence on
balance suggests that inflation
expectations are well anchored at
present policymakers would be unwise to
take this situation for granted anchored
inflation expectations were not one
easily or quickly experience suggests
that it takes many years of carefully
conducted monetary policy to alter what
households and firms perceived to be
inflations normal behavior
and furthermore that a persistent
failure to keep under inflation under
control by letting it drift either too
high or too low for too long could cause
expectations to once again become
unmoored given that inflation has been
running below the FOMC's objective for
several years now such concerns
reinforce the appropriateness of the
Federal Reserve's current monetary
policy which remains highly
accommodative by historical standards
and is directed toward helping return
inflation to two percent over the medium
term before turning to the implications
of this inflation model for the current
outlook in monetary policy I do think a
cautionary note is in order the Phillips
curve approach to forecasting inflation
has a long history in economics and it's
usefully informed monetary policy
decision making around the globe but the
theoretical underpinnings of the model
are still a subject of controversy among
economists moreover inflation sometimes
moves in ways that empirical versions of
the model which necessarily are a
simplified version of a complicated
reality cannot adequately explain and
for this reason significant uncertainty
attaches to Phillips curve predictions
and the validity of forecasts from this
model do have to be continuously
evaluated in response to incoming data