Monetary policy announcements and household expectations
(August 2021, originally published as "Are households indifferent to monetary announcements?", revised April 2026)
Summary
Focus
An important channel of monetary policy transmission operates through agents' expectations about inflation. Central banks' communication strategies aim to steer agents' expectations consistently with the monetary policy decisions taken. It is generally acknowledged that financial markets participants' expectations react promptly to monetary policy announcements. But how well do such strategies perform in shaping expectations of households, especially those less sensitive to economic news?
Contribution
We study the impact of the Federal Reserve's monetary policy announcements on households' expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee (FOMC) meetings, over the period 2013-19. Unlike studies based on experimental evidence, where households are provided with specific information about the outcomes of FOMC meetings, our approach captures households' unprompted reactions to the Federal Reserve's announcements.
Findings
We find that monetary policy announcements influence expectations of interest rates on savings accounts, particularly among respondents with high financial literacy. However, their impact on inflation expectations remains muted, even after relevant FOMC meetings during that period. To explain this limited sensitivity, we explore possible explanations such as a lack of information, understanding or attention to monetary policy. While these factors partially contribute to the observed patterns, they do not fully explain the muted response of household inflation 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, ie 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, ie not enough households grasp the transmission of monetary policy to real activity and/or inflation; and iii) lack of attention, ie 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.
JEL classification: E30, E40, E50, E70
Keywords: monetary policy, expectations, household survey, central bank communication
