The Two Charts That Show We Need QE3

Federal Reserve Chairman Ben Bernanke arrives at his press briefing at the Federal Reserve building, on April 25, 2012 in Washington, DC.

Photograph by Mark Wilson/Getty Images.

Would a third round of quantitative easing boost the economy? You bet it would. The evidence?

Marcus Nunes shows that the Fed’s QE programs are effective tools for shifting inflation expectations:

Now in normal times, you might think higher inflation expectations would be bad for growth, illustrating market expectations of irresponsible government policy. But David Glasner shows that in our present morass, higher inflation expectations are correlated with higher equity prices:

The markets are voting with their feet for the proposition that a more inflationary environment would also be an environment with more real output. And the Fed has the ability to shape those explanations. If they announced a third round of quantitative easing and stated explicitly that they’d like to prop up inflation expectations and total nominal spending, it should be highly effective.