Is QE Really Inflationary? The Biggest Factors Behind Higher Stock and Gold Prices

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Monetary stimulus broke records this year as the Federal Reserve launched infinite quantitative easing, but in a low interest rate environment, monetary policy is less important than fiscal policy in determining asset prices, said Lyn Alden, founder of Lyn Alden Investment Strategy.

The last time the federal deficit as a percentage of gross domestic product was this high was in World War 2 in the 1940s, a rapid increase in inflation followed, albeit not immediately.

The impact of fiscal stimulus on the economy becomes more prominent when central banks experience limited monetary policy options, Alden said.

“Once those rates hit the zero bound, [the Fed’s] tools are pretty much extended by that point. They don’t really have a ton left on their own to do, whereas fiscal authorities still have a lot of capacity to do things, and so that’s generally the relationship we see play out over time which is that when monetary policy runs out of ammo, that’s when we usually see more fiscal spending,” she said.

Inflation is not expected to hit the economy in the short-term, Alden said, noting that the timing of fiscal stimulus is important.

“If you look at inflation expectations, which is looking at the TIPS market compared to the normal treasury market, you can factor out and see what the treasury market is pricing in for inflation expectations. That had a reversal at the beginning of September, so inflation expectations were rising all year but then on the last month or so they’ve been on a downtrend again. I think a lot of that is tied to the fact that stimulus isn’t really implied anymore. Most of the stimulus effects ended at the end of July,” she said.

On investable asset classes, a higher inflationary environment is more conducive to price appreciation, Alden added.

“When you get that stimulus, when you get that inflationary impulse, it tends to be good for equities, especially some of the more value-oriented equities, and it tends to be very good for precious metals, because it can boost inflation expectations and therefore decrease the real yield on bank accounts and treasuries, and it tends to be good for risk assets generally. In particular, some foreign stocks and do pretty well, especially if the U.S. is stimulating heavily and you get kind of more weakness in the dollar,” she said.

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