FRBSF Economic Letters are brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve. This section contains Economic Letters on monetary economics and macro-finance topics.
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Firms’ Inflation Expectations During the Pandemic-Era Surge
Ina Hajdini, Simar Malhotra, Timo Reinelt
Inflation expectations among businesses can affect how they set current prices. Firms’ expectations diverged from those of professional forecasters during the pandemic-era inflation surge and moved closer to household expectations. Analyzing firms’ survey data from 2018 to 2025 reveals three main patterns behind this shift: Businesses became more sensitive to current inflation perceptions, their longer-term expectations temporarily drifted up, and their perceptions of the Federal Reserve’s inflation goal increased. However, when inflation eventually moderated, the survey data show that firms’ inflation expectations largely returned to their characteristics from before the pandemic.
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Using Inflation Shock Patterns to Help Forecast Inflation
Adam Shapiro, Kevin J. Lansing
A new indicator—the Inflation Shock Momentum Index—can help identify emerging inflationary or disinflationary pressures in real time. The index tracks the shares of consumer spending categories that are experiencing consecutive positive or negative monthly inflation shocks, allowing detection of shifts in the underlying inflation environment. The index improves inflation forecasts at one-year to three-year horizons and responds to macroeconomic shocks in line with accepted theory. Recent index readings have fluctuated above and below zero, indicating that inflation may remain near current levels in the near to medium term.
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AI-Powered Algorithmic Pricing and Monetary Policy
Greeshma Avaradi, Zheng Liu, Steven Zhao
The business practice of adjusting prices using algorithms powered by artificial intelligence—known as AI pricing—has grown rapidly and spread across many sectors in the economy. Unlike traditional price setting, AI pricing uses predictive analysis of large data sets to incorporate real-time changes in supply and demand conditions into pricing decisions. This enables businesses to adjust prices more quickly in response to unexpected changes in market conditions and monetary policy. Industry-level evidence suggests that price adjustments are more sensitive to monetary policy in sectors where AI pricing is more prevalent.
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Monetary Policy Through the Lens of Market-Based Inflation
Sylvain Leduc, Luiz Edgard Oliveira
Some goods and services prices are not directly observed and must be indirectly derived for measuring inflation. This nonmarket-based inflation category has been an important factor keeping headline inflation elevated over the past two years. Because indirectly deriving prices introduces measurement uncertainty, one monetary policy approach would be to focus solely on directly observable prices. Applying this through a well-known monetary policy rule suggests a notably lower federal funds rate. However, other rules that account for the implicit uncertainty that policymakers face would leave the federal funds rate essentially unchanged.
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Fed Communications and Inflation Expectations
Michael Bauer, Wesley Wasserburger
Monetary policy surprises—changes in various interest rates around central bank communication events—reflect new information in monetary policy actions and communications. For the Federal Reserve, surprises around Federal Open Market Committee statements and post-meeting press conferences have, in recent years, often led to meaningful market surprises that capture policy news. Event-study analysis provides new market-based evidence of monetary policy transmission: Hawkish policy surprises lower market-based inflation expectations, while dovish surprises raise them, in line with standard monetary transmission. These effects are especially strong at longer horizons.
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The AI Moment? Possibilities, Productivity, and Policy
Mary C. Daly
AI adoption and use are still evolving, and the technology itself is changing rapidly. What we know about AI and its impact on productivity growth and the economy remains uncertain. Transformations take time. We need to look for early indicators in the data and in business to get monetary policy right. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Silicon Valley Leadership Group and San Jose State University in San Jose, California, on February 17.
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Is the PPPLF Still Encouraging Small Business Lending?
Lora Dufresne, Mark Spiegel
The Federal Reserve designed its Paycheck Protection Program Liquidity Facility to ease liquidity issues and support small business lending during the pandemic. The liquidity facility allowed banks to pledge Paycheck Protection Program loans as risk-free collateral during the beginning of the COVID-19 pandemic. Analysis shows that, although the program has essentially ended, the positive effects on small business lending have persisted, particularly among small banks with lower liquidity, in keeping with the intent of the program.
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The Changing Sensitivity of Interest Rates to Oil Supply News
Wataru Miyamoto, Rami Najjar, Thuy Lan Nguyen, Dmitriy Sergeyev
A decrease in oil supply drives up oil prices, which can raise unemployment and inflation. To counter adverse effects on inflation, a central bank may choose to increase its policy rate, potentially reducing economic activity further. Changing interest rates can thus shape how unexpected oil price changes affect the economy. In recent years, interest rates have become more sensitive to unexpected oil supply news. However, market-based long-term U.S. inflation expectations did not shift significantly in response to oil supply news, suggesting that the public’s inflation expectations remain well anchored.