FOMC Announcements and Household Expectations

ABSTRACT

We study the impact of the Federal Reserve's monetary policy announcements on household expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee meetings, over the period 2013–2019. We find that Fed decisions strongly affect expectations of interest rates on savings accounts, but the impact on the expectations of other variables, notably inflation, is muted. We explore three possible factors that can rationalise our results: (i) Lack of information, that is, the signals sent by the Federal Reserve on its actions via the media are not sufficiently strong to reach a sufficiently large share of the households; (ii) lack of understanding, that is, not enough households grasp the transmission of monetary policy to real activity and/or inflation; and (iii) lack of attention, that is, most households neglect monetary policy news as they focus on issues that are perceived as affecting them more closely. We provide evidence that these explanations partly contribute to the results, but none of them fully accounts for the insensitivity of household inflation expectations.