The economist who helped change the way the Federal Reserve assesses long-run inflation expectations says their current level means the central bank needs to start laying the groundwork for shrinking its massive bond-buying program.

As head of monetary and financial market analysis at the Fed Board of Governors almost two decades ago, Brian Sack worked with his colleagues to champion the use of a forward measure of inflation expectations to help guide policy. Now director of global economics at hedge fund D.E. Shaw & Co., he says the so-called five-year, five-year forward breakeven inflation rate has climbed to a level where further increases would be problematic for the central bank.

The rate, which looks past some of the short-term noise that affects consumer prices, reached a seven-year high last month of 2.55%. That level translates into an average of over 2% annually during the half decade beginning in 2026 on the price measure the Fed actually targets. So the central bank is effectively on course to achieve its average 2% inflation goal in the eyes of investors.

The rebound from ultra-depressed levels seen during the pandemic’s initial onslaught is beneficial, Sack says. But advancing much further risks pushing inflation expectations to levels that would make it harder for the Fed to meet its twin objectives of stable prices and maximum employment.

“Inflation expectations have already risen to a level consistent with the Fed’s mandate, so my view is that the Fed should not allow them to rise further,” said Sack, who also formerly headed the New York Fed’s markets group. “It may be time to adjust the policy message to reflect that.”

The tweak in signaling may already have begun. An array of Fed officials have indicated that it may be getting close to the time to debate trimming the bond purchases. The Fed is currently adding $80 billion of Treasuries and about $40 billion in mortgage-backed securities every month to its balance sheet, to support growth and keep markets functioning smoothly. Officials aren’t expected to adjust that pace at their meeting next week.

Crucial Debate

Most Fed officials insist that inflationary pressures bubbling up now are mainly the transitory result of imbalances between supply and demand as the economy revives. Recent readings are also unusually elevated when compared to the extraordinarily low levels registered a year ago.