by Zhu Zhu
CHICAGO, May 12 (Xinhua) -- 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, so the gap between yields of TIPS and regular nominal T-bond shows how much future interest traders are willing to give up for inflation protection, which can be interpreted as the future inflation rate they expect.
Moreover, the Fed favors the "five-year, five-year-forward" break-even rate, which measures inflation expectations from five years from now to ten years from now, according to Randall.
"This break-even inflation rate is around 2.75-3 percent, which is roughly the range for many years before the financial crisis," added Randall.
Besides, the Fed also focuses on other key economic data, such as unemployment rate and economic growth. Randall said that the Fed sees the unemployment rate still quite high a year from now and sees the growth higher than it is now but not dramatically higher.
The Fed recently announced the continuation of the 600-billion- dollar bond-buying program and kept interest rates low for an " extended period." The Fed also said that it expected the economy to grow between 3.1 percent and 3.3 percent this year and the unemployment rate to fall between 8.4 percent and 8.7 percent by the end of the year.