Maybe that´s why the hawks and ‘inflationphobes’ are not aware of it. Every month, accompanying the CPI release, the Cleveland Fed releases its estimates of inflation expectations ranging from 1 year to 30 years. In March I did a post trying to show that, although it´s pretty much ignored, the measure of inflation expectations gouged by the Cleveland Fed appeared to be pretty consistent.
The chart below shows how short (1 year), medium (5 years) and long run (10 years) inflation expectations have evolved since the recession began in December 2007. It´s interesting to note how expectations reacted to both the start and finish of QE1 & QE2.
Now, just try to imagine if over three years ago, in March 2009, the Fed had implemented QE1 within a broader plan which targeted a specific level of nominal spending. If that had happened, I believe:
a) QE2 would not have been needed
b) By now aggregate demand would likely be on (or close) to the targeted value
c) Unemployment would be much low and real output much a higher, and
d) Inflation would be “on target”
Update: Ryan Avent at Free Exchange ends his post citing Menzie Chinn:
A construction-oriented phase of recovery would be most welcome now given the shaky state of export markets. But any rebound in residential investment will be bounded by the Fed’s tolerance for inflation. Indeed, as Joshua Aizenman and Menzie Chinn argue, housing might have ended its long swoon earlier had the Fed been willing to generate—or at least tolerate—a bit more inflation.
Unfortunately, “tolerating a bit more inflation”, is not the way to do it.