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Why Isn’t the Fed More Worried About Inflation Expectations?
Expected inflation, as measured by financial markets, has fallen sharply since last summer in both the eurozone and the U.S. The response of their central banks couldn’t be more different. The European Central Bank reacted with alarm and soon decided to launch quantitative easing. By contrast, the Federal Reserve has shown a puzzling insouciance. Inflation expectations matter because if business, workers, consumers and investors all believe inflation will drop, they will behave in a way that makes it more likely to happen. Stable expectations are thus a bulwark against inflation going too high or too low. There are ... (full story)