Data Revisions, Gradualism, and US Inflation Pressure in Real Time

Uncertainties associated with the informational content of real-time data and the impact of policy initiatives on expectations have been offered as rationales for gradualism in monetary policy. Our objective is to assess these potential explanations quantitatively. Focusing on inflation as the key variable of interest to central banks, we construct indices of inflation pressure to characterize the state of the economy before and after the implementation of monetary policy. Using six vintages of US data, we analyze changes in the information content of economic data across revisions and the importance of expectations in determining the impact of monetary policy. We find that monetary policy affects inflation pressure and realized inflation primarily through its impact on expectations. We also find that while the Fed manages to influence expectations almost two thirds of the time the impact can be quantitatively small at times. One policy implication is that policy communication perhaps plays an even more crucial role for a gradualist central bank than one might think a priori.