The Case for QE4 in One Chart

The chart above is the Cleveland Federal Reserve bank’s market-based estimate of inflation expectations across the years. Today the Federal Reserve Open Market Committee released its March minutes and dampened hopes for additional easing, though “a couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.”

Financial markets seem to be declining on this news, and rightly so. This sentence contains two shocking revelations. One is that only “a couple” of members think that in a scenario where unemployment is above target and inflation is below target that policy easing is the right approach. What do the other members think? Central bankers seem determined to make their jobs out to be very difficult, but this is a really easy case and a majority of the FOMC seems to be flunking it. Meanwhile, what does inflation seeming likely to remain below 2 percent over the medium run consist of if not these Cleveland Fed numbers? As an individual, you are of course free to guess that markets are currently underestimating the likely medium-term inflation outlook and go buy some inflation-indexed bonds. But what is the FOMC’s judgment as to why the marketplace is misjudging this? They don’t seem to even consider the question.