The Simple Reason You Should Bet On QE3

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Economist James Hamilton at Econbrowser has the most succinct analysis of this week’s Fed announcement:So the FOMC is saying that it would like inflation to be about 2% annually, but is expecting it only to be 1.4 to 2.0% over the next 3 years. Putting 2 and (less than) 2 together, the FOMC is telling us that, based on its price stability objective alone, the Fed is expecting inflation to be lower than it would like. In other words, even if the economy were at full employment, a little more stimulus would be called for. And of course, nobody thinks the U.S. is anywhere close to full employment.

The Fed’s forecast is for an unemployment rate between 7.4 and 8.1% for 2013. Interpretation: the Fed is expecting to exert some additional stimulus. Large-scale asset purchases– referred to popularly as more “quantitative easing”– are the primary tool available. So, if your motto is “don’t bet against the Fed,” then I wouldn’t bet against more QE during 2012.

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