Key Points:
- Quantitative Easing (QE) has led to significant balance sheet expansion by central banks.
- Research suggests a modest impact on inflation from QE.
- Inflation is not expected to get out of hand due to current balance sheet expansion.
- Jerome Powell, Andrew Bailey, and Christine Lagarde are not considered to pose a threat.
I notice charts of central bank balance sheets everywhere, perhaps because of my strong belief that quantitative easing (QE) will not result in inflation.
The balance sheets of major central banks, including the US Federal Reserve, the Bank of England (BOE), and the European Central Bank (ECB), have expanded substantially in 2020. This infusion of funds into the economy is expected to drive both growth and inflation.
Understanding the Impact of QE
Unlike the unprecedented conditions of 2009 and 2010, the effects of QE are now better understood after more than a decade of observation. Recent research on QE’s impact on economic growth and inflation suggests that a 1% increase in a country’s GDP due to QE leads to a modest rise in the price level. If these findings are applied to the current balance sheet expansion, a slight increase in the price level is expected across the US, UK, and the eurozone.
It’s important to note that this projected rise in the price level does not equate to a significant uptick in inflation. For inflation to surge significantly, a sustained and substantial expansion of central bank balance sheets over multiple years would be required.
The Overall Effect of Balance Sheet Expansion in 2020
Despite the massive balance sheet expansion by central banks, the overall impact on inflation is anticipated to be minimal. The potential for inflation to escalate to alarming levels would necessitate far greater and prolonged balance sheet expansions than those witnessed during the financial crisis and the COVID-19 pandemic. Therefore, fears surrounding central bank balance sheets and associated charts are considered unwarranted, with Jerome Powell, Andrew Bailey, and Christine Lagarde perceived as posing no significant threat.
For further insights from Joachim Klement, CFA, explore 7 Mistakes Every Investor Makes (And How to Avoid Them) and Risk Profiling and Tolerance. You can also sign up for his Klement on Investing commentary.
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Please note that all opinions expressed in the article are those of the author and should not be interpreted as investment advice. The views expressed do not necessarily reflect the opinions of CFA Institute or the author’s employer.
Image courtesy of the US Federal Reserve
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