"Why has quantitative easing coexisted with price stability in the United States? Or, as I often hear, “Why has the Federal Reserve’s printing of so much money not caused higher inflation?” Martin Feldstein
Inflation has certainly been very low. During the past five years, the CPI has increased at an annual rate of just 1.5%.
By constrat,the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities, nearly ten times the annual rate of bond purchases during the previous decade. In 2012 the stock of bonds on the Fed’s balance sheet has risen more than 20%.
From the experiences in Germany hyperinflation in the 1920's and in Latin America in the 1980's(e.g. Bolivia and Perú) it shows that rapid monetary growth does fuel inflation.
Even America's own experience shows that even with a more moderate increase in money growth it has
ended in high inflation rates."In the 1970’s, US money supply grew at an average annual rate of 9.6%, the highest rate in the previous half-century; inflation averaged 7.4%, also a half-century high. In the 1990’s, annual monetary growth averaged only 3.9%, and the average inflation rate was just 2.9%
That is why the absence of any inflationary response to the Fed’s massive bond purchases in the past five years seems so puzzling. But the puzzle disappears when we recognize that quantitative easing is not the same thing as “printing money” or, more accurately, increasing the stock of money'' says Feldstein.
Because since 2008 the Fed started to pay interest rates on excess banks reserves.This policy induced the banks
to keep and maintain this excess reserves in safe and liquid deposits,and didn´t lead after 2008 to a much larger deposit growth and much larger stock of money.
So, while M2 grew by more than 6% from 2008 to 2012, nominal GDP grew by just 3.5% and the GDP price index rose by only 1.7%.
So it is not surprising that inflation has remained lower, than in any decade since the end of World War II. And it is also not surprising that QE has done so little to increase nominal spending and real economic activity.
The absence of significant inflation in the past few years does not mean that it won’t rise in the future. When businesses and households eventually increase their demand for loans, commercial banks that have adequate capital can meet that demand with new lending without running into the limits that might otherwise result from inadequate reserves. The resulting growth of spending by businesses and households might be welcome at first, but it could soon become a source of unwanted inflation.
The Fed could, in principle, limit inflationary lending by raising the interest rates.
But the Fed may hesitate to act, or may act with insufficient force, owing to its dual mandate to focus on employment as well as price stability. Or because it gets more broadly thought that for the purpose of higher growth Central Banks can raise their inflation targets as U.K. and Japan are doing now.
The growing concern is that the Fed will hesitate if the rate of unemployment remains high even as the inflation rate rises.
So investors are right to think that inflation could be higher in a more longer term, even as it has not
happened in times of throwing money from a helicopter.
