Long-term inflation expectations in the United States are becoming increasingly well anchored, showing that financial markets now view the Federal Reserve's commitment to its 2% inflation target as more credible than at any point in recent years, according to a November 2026 economic letter published by the Federal Reserve Bank of San Francisco. The finding suggests the central bank may have more flexibility to tolerate temporary inflation spikes caused by supply shocks without risking a spiral in price expectations.

The report tracked how market-based long-run inflation expectations respond to surprise monetary policy moves, a metric the authors call the "sensitivity measure." A reading near zero indicates strong anchoring, while significantly negative values signal weakness. Over the full 1999–2026 period, the sensitivity measure stood at –0.34, meaning a 1 percentage point unexpected rate hike drove long-run inflation expectations down roughly 0.34 percentage point as markets reassessed the Fed's resolve. The measure hit its weakest point between 2018 and 2020, bottoming out at –0.89 in 2018 using a five-year rolling window and –0.81 in 2019 using a 10-year window. But by June 2026, the five-year estimate had climbed to –0.23 and was statistically indistinguishable from zero, while the 10-year estimate reached –0.32, still negative but trending sharply upward. When the authors widened their measurement window to include Federal Reserve Chair press conferences alongside policy statements, the June 2026 five-year estimate improved further to –0.08, and the 10-year estimate moved to –0.22, with both becoming statistically insignificant.

The report attributes the strengthening anchor to two pivotal Fed actions. First, the central bank adopted average inflation targeting in August 2020, signaling greater tolerance for temporary price increases and helping stabilize long-run expectations around the 2% goal. Second, the Fed launched its post-pandemic tightening cycle in March 2022, raising the federal funds rate to combat elevated inflation and reinforcing market perception of its inflation-fighting commitment. The authors note that verbal communication by the Chair in recent years has bolstered credibility, as evidenced by the stronger anchoring results when press conferences are included in the analysis.

The findings carry practical implications for how the Fed manages future supply shocks like the recent oil price surge. Because financial market participants increasingly perceive the Fed as committed to its long-run inflation goal, the central bank may be able to take a more measured approach to cooling prices without triggering a destabilizing shift in expectations. The report concludes that in response to recent supply shocks, it may now be feasible for the Fed to tolerate temporary above-target inflation while expectations remain well anchored, offering policymakers breathing room to balance price stability against economic growth without sacrificing one for the other.