The central bank of the U.S. could use inflation expectations as a gauge for the tightening for fiscal policy as inflationary pressures begin to increase, according to Bloomberg. The Federal Reserve has seen expectations for annual consumer-price inflation increase by 43% since it began a second round of quantitative easing in November to 2.10%, measured by the breakeven rate for five-year Treasury Inflation Protected Securities. That gauge is now close to the pre-recession level when interest rates were at 5.25%, compared to a record low of near-zero today.
A former Fed official, Alfred Broaddus, said, “It’s highly likely that some movement in inflation expectation will be the first signal that they need to take action,” adding, “The Fed is right to be watching this very, very closely.” The speculation over the Fed’s next action has increased in recent weeks, with regional leaders calling for a range of steps for the tightening of policy. Broaddus explained the increased discussion, “This is one of those really critical turning points in monetary policy where it’s pretty clear the next move is toward tightness, and the whole question is timing.” Fed Chairman Ben Bernanke said at a press conference on Apr. 27, “If inflation persists or if inflation expectation begin to move, then there’s no substitute for action.”