Inflation in the United States began to rise in early 2021, peaking in 2022 before showing a slow decline. The initial surge was linked to supply chain disruptions and increased demand for goods during the COVID-19 pandemic. While inflation for goods dropped rapidly after mid-2022, overall inflation, which includes both goods and services, has remained above the Federal Reserve’s target of 2 percent.
Researchers have examined how monetary policy responses may contribute to persistent inflation. During the post-pandemic period, financial markets perceived that the Federal Reserve’s reaction to rising inflation had weakened. According to Bocola and others (2024), “during the post-COVID inflationary period, financial markets perceived that the Federal Reserve’s response to inflation had weakened.” They introduced an “inflation feedback parameter” to measure how much policymakers are expected to adjust interest rates in response to deviations from their inflation target.
Data show that between 2017 and 2019, a one percentage point increase in expected future inflation led markets to anticipate a 1.9 percentage point rise in nominal interest rates. However, from 2020 to 2022, markets only expected a 1.1 percentage point increase for the same change in expected inflation. This shift suggested a weaker anticipated policy response during this period. In contrast, after the Federal Reserve raised interest rates and maintained tight monetary policy from 2023 onward, market expectations indicated a stronger response.
Research by Doh and Yang (2023) found that when markets expect smaller changes in policy rates following shifts in inflation, current inflation becomes more closely tied with future levels—resulting in greater persistence of elevated prices over time. Their findings suggest that “a weaker interest rate response to inflation increases inflation persistence.”
Sargent and Williams (2025) caution that if policymakers assume low persistence is inherent rather than influenced by their actions, they risk underestimating how long high inflation might last after what appears to be a temporary shock. They argue: “if this muted response to inflation is embedded in the private sector’s inflation expectations, then inflation persistence is likely to rise.” As such, recognizing that monetary policy can shape the duration of elevated inflation may help avoid prolonging its effects.
The authors conclude that recent experience demonstrates how perceptions of central bank responses can affect how long higher-than-targeted inflation persists.
The article was written by Taeyoung Doh, senior economist at the Federal Reserve Bank of Kansas City, and Stephen Vasiljevic, research associate at the bank. The views expressed do not necessarily reflect those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
