But in my view, when such changes result from revised estimates of u* or r*, they merely reflect an updating of an existing reaction function. In addition to u* and r*, another important input into any monetary policy assessment is the state of inflation expectations.
Since the late 1990s, inflation expectations appear to have been stable and are often said to be “well anchored.” However, inflation expectations are not directly observable; they must be inferred from models, other macroeconomic information, market prices, and surveys. Longer-term inflation expectations that are anchored materially above or below the 2 percent inflation objective present a risk to price stability.