The cue for the Federal Reserve to start withdrawing its recordmonetary stimulus may be a measure of its own credibility:inflation expectations.

Expectations for annual consumer-price gains have jumped by 43percent to 2.10 percentage points since the central bank began itssecond round of asset purchases in November, as measured by thebreakeven rate for five-year Treasury Inflation ProtectedSecurities. The measure is close to levels before the recession —when the central bank's benchmark interest rate was 5.25 percent,compared with about zero today.

“It's highly likely that some movement in inflation expectationswill be the first signal that they need to take action,” said J.Alfred Broaddus, 71, former president of the Federal Reserve Bankof Richmond, whose career dates back to the inflation surge of the1970s. “The Fed is right to be watching this very, veryclosely.”

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