Even economies that do allow their currencies to appreciate are at risk of asset bubbles as cheap money seeks higher yields. The other problem is that easy money chasing high-yielding assets drives hot money into the emerging world, fans inflation and triggers monetary tightening which in turn slows growth -- creating a vicious circle.
QE3 will force one globally positive growth area, emerging markets, to slow down because of inflation We could end up with a negative effect. Regulatory News Updated. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Monetary Policy Federal Reserve.
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Related Articles. In other words, the Fed has quite easily been able to push inflation expectations back up to its 2 percent target, but no more. QE1 and QE2 had big effects, because they came when expected inflation was well below 2 percent and falling; QE3 has not, because expected inflation was already around 2 percent. But wait. The Fed unveiled the Evans rule back in December, telling us it wouldn't raise rates before unemployment falls to 6.
In other words, isn't the Fed's 2 percent inflation target really a 2. Not exactly. The Fed is telling us it will tolerate 2. The best way to figure out what the Fed wants is to listen. After all, it tells us what it thinks will happen with GDP, unemployment, and inflation over 1, 2, and 3-year periods. Now, it's GDP and unemployment predictions have been, in the spirit of generosity, a tad optimistic , but not so for inflation which, not-so-coincidentally, is the only above variable the Fed controls directly.
The chart below looks at the Fed's core PCE inflation projections since late ; upper-range estimates for 1, 2, and 3-year periods are in red, and lower ranges ones are in blue. This is what a 2 percent inflation ceiling looks like.
There's a lot going on here, but there's a depressingly simple message in this chart: QE3 isn't working, because the Fed doesn't want it to work. The Fed revised its inflation projections up after QE1 and QE2, and markets followed; the Fed has kept its inflation projections steady after QE3, and, again, markets have followed.
Now, this doesn't mean QE3 is entirely useless -- it's at least stopping inflation expectations from falling -- just that it could be doing much more if the Fed let it. That would be simple enough. The Fed could make its forecasts symmetrical around 2 percent, rather than peaking at 2 percent.
Or it could say it expected or is that wanted? That leaves us with one last question.
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