Interview: Ex-Fed official says U.S. monetary policy unlikely to reverse before rapid change in inflation expectations

Posted on May 16, 2011 in AllEconomic News
The U.S. Federal Reserve (Fed) is unlikely to reverse its relaxed monetary policy before there is rapid movement in the inflation expectation, said Randall Kroszner, a former member of the Federal Reserve (Fed)’s board of governors.

The Fed usually bases its monetary policy decision on such forward-looking indicators as inflation expectation. “A movement of 50-75 basis points is seen as rapid change over the long run and would raise warning flag for the Fed to react sooner rather than later,” Randall, now an economics professor at the University of Chicago, told Xinhua in a recent interview.

“Fed will be very much focused on that (inflation expectations) and particularly on the long-run expectations, not just the short- run factors, such as unrest in the Middle East,” said Randall.

“The data is always about the past, but the policy need to be made about the future, what you need to do is to forecast what are the things going to be and respond today to what you think conditions will be in six month or a year from now,” added Randall.

Randall said the difference between the price of Treasury inflation-protected securities (TIPS) and regular nominal Treasury bond is a good indicator of market expectations over inflation. TIPS are regularly adjusted for inflation,

via Interview: Ex-Fed official says U.S. monetary policy unlikely to reverse before rapid change in inflation expectations – People’s Daily Online.