Paul Lachine

Why Is US Inflation So Low?

The main reason why quantitative easing has coexisted with price stability in the US is that, since 2008, the Fed has paid interest on commercial banks' excess reserves, which previously would have been lent to businesses and households. That is why investors are right to be worried about higher inflation as demand picks up.

CAMBRIDGE – 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?”

Inflation has certainly been very low. During the past five years, the consumer price index has increased at an annual rate of just 1.5%. The Fed’s preferred measure of inflation – the price index for personal consumption expenditures, excluding food and energy – also rose at a rate of just 1.5%.

By contrast, the Fed’s purchases of long-term bonds during this period has been unprecedentedly large. 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 the last year alone, the stock of bonds on the Fed’s balance sheet has risen more than 20%.

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