By Jeffrey Klingelhofer

Since the “Great Recession” began in late 2008, the Federal Reserve has responded decisively and aggressively in an attempt to contain economic malaise and spur growth. With the Federal Funds rate effectively pegged at zero, the traditional means of “easing” conditions vital to growth have been exhausted, and the Fed has been forced to resort to less conventional measures to spur activity. Chief among these have been Large Scale Asset Purchases (LSAPs), better known as quantitative easing. While many debate the efficacy of these policies, a clear outcome of the purchases has been unprecedented growth in the scale of the Fed’s balance sheet (Figure 1), leaving us to wonder about the eventual consequences for the real economy.



The leading concern is the fear of an eventual and significant rise in inflation. At the time of this writing, both GDP growth and inflation were annual return (-0.25 percent), it is understandable that investors harbor concerns.

Here we will examine the currently available data, look at potential pathways to a significant rise in inflation, point to the risks we are watching, and share our outlook.

Does a Significant Increase in Money Supply Always Result in an Increase  in Inflation?

Milton Friedman proclaimed, “Inflation is always and everywhere a monetary phenomenon.” While we agree that inflation is always the result of too much
money chasing too few goods, the question we face in today’s environment is whether a significant rise in money supply always results in a rise in inflation.