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The main way in which unconventional Fed policy can work is by changing expectations — especially expected future inflation.
What it did was show that unemployment wasn't the only determinant of current inflation; expected future inflation is also crucial.
It is still possible to generate expected future inflation by reducing the current price level relative to the future price level, but that's problematic, for two reasons.
If a dollar is expected to be worth less in period t+1, then people will use their dollar in period t, turning expected future inflation into current inflation by inducing people to spend and invest in the present.
Inflation equals the first difference of the general price level, p, and is assumed to be a function of past inflation, expected future inflation, excess demand (4),10—reflecting demand-pull inflation tax increases, and cost-push (or mark-up) shocks, (v_t^{mathrm{p}}).11.11
Furthermore, financial economics requires future values of investments to be discounted by the expected future inflation rate.
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Other reasons cited are the threat of rising interest rates, which could be damaging for highly leveraged water companies, and expected future low inflation.
"The reason expected future real rates are low is that monetary policy has responded and is expected to continue to respond appropriately to persistent forces weighing on demand and inflation.
For theorists, any rise in an indicator of expected or future inflation, like the recent boom in commodity prices, suggests that the Fed's credibility is at risk.
"We expect future scorecards will reflect that".
Although professional forecasters' expectations of future inflation have stabilised, the proportion of ordinary folk expecting higher prices has risen.
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