The QE retreat
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In this guest post, Bill Nelson, formerly a deputy director of the Federal Reserve Board’s Division of Monetary Affairs and the current chief economist of The Clearing House, explains how the open-ended asset purchase programme caused Fed officials to rethink their approach to managing the balance sheet.
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.) We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions). Let’s start by looking at the changes in actual inflation since the start of 2010.