Fed Faces New Challenge as Inflation Expectations Drift Away From 2% Target
A new study from the Federal Reserve Bank of Boston suggests that U.S. households may be growing increasingly skeptical of the Fed’s ability to rein in inflation — and that shift in perception could complicate the central bank’s policy path far more than recent price surges did.
The research finds that Americans’ short-term inflation expectations are rising again, but this time, the movement isn’t being fueled by higher grocery or energy costs. Instead, households appear to be bracing for broader and more persistent inflation, a sign that confidence in the Fed’s control over prices might be slipping.
Economists Philippe Andrade and Michael Wicklein, who authored the paper, compared recent data from the University of Michigan’s consumer surveys with historical patterns. They found unsettling echoes of the late 1970s, when inflation became entrenched in public psychology and only subsided after the Fed’s famously aggressive rate hikes.
During previous bouts – such as the pandemic-era spike – expectations climbed sharply but were mostly tied to specific supply shocks like fuel and food. The current trend, however, cannot be easily explained by commodity price movements. That independence from short-term factors, the researchers warned, “raises the risk that inflation expectations could become unanchored once again.”
The shift comes as consumers react to new trade measures under the Trump administration, which have intensified concerns about the cost of imported goods. Economists inside and outside the Fed are now debating whether these tariffs will create a brief inflation flare-up or a longer-lasting pressure that feeds into wage and pricing behavior.
While policymakers have publicly downplayed the risk, data tell a different story. The New York Fed’s September survey showed one-year-ahead inflation expectations rising to 3.4%, with the three- and five-year outlooks still hovering well above the central bank’s 2% goal.
The Boston Fed paper notes that inflation surges in the early 1970s and the pandemic were largely explainable – both driven by extreme increases in energy and food prices. But today’s climb, like the one in the late 1970s, appears to stem from psychology rather than supply. Such shifts in mindset, once established, can be far more damaging than price shocks themselves.
So far, researchers say the risk of “de-anchoring” remains contained, but they caution that the trend warrants close monitoring. History shows that once public trust in the Fed’s ability to manage inflation begins to fray, rebuilding it requires painful policy measures – and years of patience.
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