Federal Reserve's Lockhart: Oil shock could lead to QE3 - Mar. 7, 2011If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.
Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.
If one is familiar with economic history, an important reason inflation expectations became unanchored and stagflation set in during the 1970s into the first part of the 1980s was on account of overly accommodative monetary policy. In the face of rising inflation, monetary policy should be tightened, not loosened. If the 1970s experience is relevant--and there is little reason to suggest that looser policy in the face of rising inflation would lead to greater economic growth and reduced inflation--maintaining abnormally low interest rates and/or pursuing an additional round of quantitative easing on account of an oil price shock would increase the risk of a sustained and significant bout of inflation. Afterward, monetary policy would very likely have to be tightened to the put of exacerbating a sharp recession so as to reign in inflation and re-anchor inflation expectations.