Asking people about future interest rates makes them predict bigger changes

A new study finds that asking people hypothetical questions about central bank policy makes them predict bigger economic changes. This means central banks can trust the direction of consumer surveys, but must adjust for overstatements when using hypothetical scenarios.

Central banks need to know if their interest rate changes will make people expect higher prices or more jobs. This paper shows that simpler, cheaper hypothetical questions can tell them the direction of those expectations, but the public's predicted reactions will always look bigger than what other methods show. This means central banks can use these quicker surveys, but they now know to discount the size of the public's expected reaction.