One piece of evidence on how expectations are formed is provided by a recent special questionnaire in the ECB’s Survey of Professional Forecasters (SPF), in which participants were asked about the factors that inform their longer-term expectations, meaning four or five years ahead.13 The responses indicated that trends in inflation emerged as a substantial driving factor, and it is fair to assume that such trends build to a very large extent on historical and thereby backward-looking data on actual inflation. However, the ECB’s inflation objective has remained the most important factor informing the longer-term expectations of SPF participants. Given that trends in actual inflation have clearly weakened in recent years, the role of the inflation objective as an anchor of expectations has been brought more strongly to the fore. One sign of this is the looser association in recent times of longer-term inflation expectations with the average of actual inflation calculated cumulatively over the history of monetary union (Chart 10). While this average ‒ and the same holds for averages taken over shorter time spans ‒ has come down over the period of low inflation, longer-term expectations have declined to a much lesser extent. This suggests that participants have not been overly extrapolative in forming their expectations about inflation. 15 / 19  BIS central bankers' speeches  Maintaining the medium-term inflation goal as the guideline for households, firms and market participants in forming expectations also requires a consistent communication strategy, especially when the near-term track record of inflation outcomes has deviated from the objective.

The policy actions the Fed takes will depend on how economic conditions develop. If circumstances change, our policies will adapt. No matter the circumstances, I assure you that we at the Fed are doing everything we can to achieve the goals of maximum employment and stable prices. Thank you very much. References Board of Governors of the Federal Reserve System. 2011. “Minutes of the Federal Open Market Committee”, June 21–22. Board of Governors of the Federal Reserve System. 2012. “Press Release”, January 25. Federal Reserve Bank of New York. 2010. “Quarterly Report on Household Debt and Credit”, August. Feroli, Michael E., Ethan S. Harris, Amir Sufi, and Kenneth D. West. 2012. “Housing, Monetary Policy, and the Recovery”. Presentation to the 2012 U.S. Monetary Policy Forum, New York, February 24. Jordà, Òscar , Moritz Schularick, and Alan M. Taylor. 2011. “When Credit Bites Back: Leverage, Business Cycles, and Crises”. NBER Working Paper 17621. Mian, Atif, Kamalesh Rao, and Amir Sufi. 2011. “Household Balance Sheets, Consumption, and the Economic Slump”. Presentation at American Economics Association meetings, Atlanta, GA, January 8, 2012. Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press. 7  For more information, see Board of Governors (2012). BIS central bankers’ speeches  5  Williams, John C. 2012. “The Federal Reserve’s Mandate and Best Practice Monetary Policy”. Presentation to the Marian Miner Cook Athenaeum, Claremont McKenna College, February 13. 6  BIS central bankers’ speeches