Monetary Policy Announcements, Consumers' Inflation Expectations and Consumption Plans

Can monetary policy stimulate consumption through inflation expectations? We study how US consumers revise inflation expectations and planned consumption in response to monetary policy shocks using VAR models, where we identify exogenous policy shocks with interest rate surprises around FOMC announcements. Based on survey data, we construct measures of changes in planned consumption conditional on how consumers update their inflation expectations. Expansionary policy shocks tend to increase planned consumption conditional on higher expected inflation outside the zero lower bound (ZLB), but the effect is small. At the ZLB, consumers increasingly plan to reduce consumption if they expect higher inflation. The responses to contractionary shocks are generally less systematic. Overall, we find only limited evidence suggesting that policy-induced variations in inflation expectations are associated with adjustments of consumption plans that are in line with the predictions of standard macroeconomic models