Fed's Williams Says Pandemic Changed Inflation Expectations

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00:00To me, the lesson from this is history matters.

00:04The fact that we had very low inflation for decades in the United States and many other countries

00:08before the pandemic, I think, was hugely influential in how people formed their inflation expectations

00:14during the pandemic and hugely helpful.

00:17But to your question, I don't think you can take that for granted.

00:20The past five years have, I think, changed people's perceptions of the inflation.

00:25What can happen?

00:27I'll give you an example.

00:27The survey of consumer expectations that we conducted, the New York Fed, if you looked

00:32at the inflation expectations of the young, which means anyone younger than me, no, actually

00:37it means anyone under 40, they basically had never seen inflation.

00:42My kids, who are 31 and 27, have never seen inflation really in their lives.

00:46They were wondering what I was doing all the time, fretting over inflation.

00:50And their inflation expectations, not just my kids, but throughout our survey sample,

00:55was much lower than for all of us who are older.

00:59And during the pandemic, we've seen that distribution move up.

01:02And now it's basically the same whether you're under 40, 40 to 60, or over 60.

01:07So you've seen how that kind of mean expectation changes.

01:11You see how the uncertainty has risen pretty significantly.

01:14In the SCE, we ask people to provide probability density forecasts.

01:19And you see how that uncertainty has changed.

01:22So I guess my answer to you is, you know, I think that this is different initial conditions

01:25in 2019.

01:26I'm not making a prediction of what that means.

01:29But I think we just have to, you know, be very aware and very aware that inflation

01:33expectations could shift in ways that would be detrimental.

01:37I would go back to the experience in the U.S.

01:39And I would agree with what you said.

01:41Longer term inflation expectations didn't really move, at least to the measures I focus

01:46on.

01:46But we did see in the New York Fed survey, we asked a movement in the three-year ahead inflation

01:51expectations.

01:52That did move up in 21 and 22.

01:55Well, 20 and 21, I should say.

01:57And that, to me, was somewhat, that was starting to get concerning.

02:01One-year ahead inflation expectations, that tends to follow inflation.

02:04It did before the pandemic, it did during the pandemic period.

02:09We saw three-year ahead inflation expectations moving up.

02:11And that's not something you would want to see move a lot.

02:14And so I think that as I, you know, you think about this, longer term inflation expectations,

02:19you want them to be anchored.

02:20But you, going back to my earlier point, you want all the whole, if you will, the whole

02:25curve of inflation expectations to be well behaved.

02:28Now, that doesn't mean they don't move, because inflation has some persistence.

02:31But it means that they move in a way that has it converging back to target, back down

02:37to, you know, where it was within, you know, several years.

02:41So I think that, to me, I think that you can't take inflation expectations being well anchored

02:46for granted.

02:47You have to, again, from a risk management point of view, make sure that they do remain

02:51anchored.

02:52Because I think that has been hugely helpful for us in achieving both our maximum employment

02:57and price stability goals.

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