A short article published in The Atlantic yesterday suggests that, based on past decision-making and Federal Reserve press releases, the likelihood that a third round of quantitative easing will occur is relatively low. The graph below shows the relationship between the Fed’s balance sheet (blue) and core inflation (red).
Core inflation dropped significantly in 2009, and the Fed subsequently expanded its balance sheet with QE1 to combat the specter of deflation. It again engaged in a quantitative easing program, QE2, in late 2010 when the core inflation continued to drop. Now, however, inflation seems stabilized around the 2 percent level. According to the Fed:
“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.”
It appears that, unless inflation drops below this 2 percent level for a prolonged period, a third round quantitative easing is unlikely.
