November 2012

Subscribe online now! www.ibjonline.com

Illinois Business Journal

Page 3

Feds efforts to invigorate the economy trigger worries of inflation

By ALAN J. ORTBALS In mid-September, the U.S. Federal Reserve Bank embarked on phase three of its quantitative easing strategy to boost the economy. QE3, as it is referred to, met with skepticism from critics and incited fears of inflation. Under quantitative easing, the Fed buys treasury bonds or mortgage-backed securities from banks, putting more money in circulation and driving down interest rates. The goal is to spur loan demand via the lower interest rates, induce banks to lend more readily and push investments in other directions. As its moniker implies, QE3 is the third iteration of the quantitative easing strategy utilized by the Fed in recent years. Economists are uncertain what effect QE1 and QE2 have had. The problem, according to Frank Spreng, economics professor and director of the MBA program at McKendree University, is that interest rates are already at historic lows and businesses arent much interested in borrowing money anyway. Interest rates are so low that its hard to have any impact at this point through interest rate reduction, Spreng said. Banks are sitting on all of these potentially loanable funds. But a lot of companies are reluctant to borrow and banks are a little bit gun shy about lending - because if things go haywire again, theyre going to be stuck a second time, holding loans that theyre going to have trouble collecting on. I think the uncertainty has built a huge amount of caution and risk adversity into the market. While Spreng says that quantitative easing wont have much impact on

Interest rates are so low that its hard to have any impact at this point through interest rate reduction. Frank Spreng economics professor and director of the MBA program, McKendree University
igniting the moribund economy, he says that it has the very real potential to produce inflation. You havent had any inflation yet, said Spreng, but you havent had any increase in economic activity either. Now I can guarantee you, no matter what the policy is, eventually were going to get a pick-up in economic activity. I dont know when... whether it happens after six months or a year or two years, but its going to happen. When it happens and when it really begins to get rolling and when GDP goes back to 4 percent growth per year and unemployment falls to 5 or 6 percent and we can be sure that it will - when that happens, resources will get tight, all that liquidity is out in the market and thats when inflation would take hold. But David Wheelock, deputy director of the research department at the Federal Reserve Bank of St. Louis, says that the Fed has things under control. There are concerns of some within the Fed about the inflationary potential of the Feds quantitative easing program, Wheelock said, but I think the preponderance of views within the system are that we have been engaging in this activity primarily to try to stimulate a very weak economy. And in this environment, inflation is unlikely to increase very much at all.
Tiffany L. Baldwin Fairview Heights, IL Ryan T. Barke Fairview Heights, IL Edward S. Bott, Jr. Belleville, IL Alex J. Cornwell Belleville, IL Thomas F. Hennessy, III Swansea, IL Linda M. Italiano Swansea, IL

Nevertheless, Wheelock says, the Fed is keeping a watchful eye on key economic indicators that would signal the start of an inflationary trend. We certainly are very cognizant of watching the markets expectations for inflation as measured by, for example, the break-even rates on Treasury Inflation-Protected Securities or socalled TIPS, Wheelock said. We look closely at those. We also look at survey measures of inflation expectations, both by professional forecasters and by consumers. None of those signals are showing red flags at this point. Inflation expectations have been pretty well anchored at around the Feds 2 percent target throughout this episode, and we havent seen much change in those signals after the announcement (of QE3). Wheelock adds that, unlike the 1970s when inflation was rampant, there hasnt been much of an increase in the rate of growth of the money supply. Instead, the Fed has built a lot of reserves into the banking system. Rik Hafer, distinguished research professor and chairman of the department of economics and finance at Southern Illinois University Edwardsville, agrees with Wheelock. He says that while the Feds quantitative easing policies have the potential to ignite inflation if it were

to simply allow banks to lend out the massive amounts of reserves that they have accumulated under these programs, the Fed can take steps to absorb reserves from the banking system - thus alleviating the inflationary potential. Unlike the Feds of the 1960s and 1970s, Hafer said, todays Fed is keenly aware of the inflationary potential that its recent actions engender. They took policy actions that they needed to in light of the economic environment. I believe that the Fed will, if necessary, take appropriate actions to keep inflationary pressures from building. While a stronger-thananticipated recovery could see inflation rates rising to the 3 to 4 percent range, I believe the Fed would not allow inflation to rise appreciably higher, nor would they allow it to remain above their target -unofficially around 2 percent for core inflation - for an extended period of time. But Spreng is not so sure. He says that the Fed has essentially been dumping money into the market, hoping to rev up the economy. By the time it realizes that the situation has been reversed and inflation is on the rise, it might be too late. They can turn the spigot off real fast, but they cant pull back whats already out there, Spreng said. Theres a lag between when some of the inflation gets built in and when it shows up in the numbers. And once it begins to show up, you have to convince everybody that its there before you can act. And then, after youve acted, it takes time for it to take hold. During that lag, you can do a lot of damage. Even if it is true that they (the Fed) can close the spigot very quickly, Spreng added, it presumes that they will know when to do it.

We Get It.

Dayna L. Johnson Glen Carbon, IL Joseph R. Lowery Belleville, IL Cherie K. Macdonald OFallon, IL

INTRODUCING A NEW TITLE COMPANY WITH OVER 30 YEARS OF EXPERIENCE

When you close an important real estate transaction, it has to be right from beginning to end.Thats exactly what you can expect from IllinoisTitle & Escrow. Our company may be new, but our professional staff shares a combined total of more than 30 years experience, plus they are experts in local customs and practices. So call Maureen Donaho, Cheryl Barham or Jessica Ledbetter at 618-257-8700 for more information about how we can make your next closing exactly what it ought to bejust right.

Dynamic banking and financial solutions.

To help clients succeed in ever-changing markets, Greensfelder attorneys provide dynamic legal services with precision. Whether your business needs to get the ball rolling on a corporate restructuring plan or is working through a bad break, we aim to provide you with the best advantage. It makes a difference. Your bottom line will show it.

Joseph B. McDonnell Belleville, IL Laura C. Oberkfell Belleville, IL Amy L. Pauls Belleville, IL Garrett C. Reuter Belleville, IL Garrett C. Reuter, Jr. Belleville, IL Eric R. Riess Belleville, IL William A. Schmitt Waterloo, IL Donald K. Schoemaker Belleville, IL Russell K. Scott Belleville, IL George A. Skip Uhl Belleville, IL L. Kevin Vick Belleville, IL Donald E. Weihl Belleville, IL Patricia H. Wharton Belleville, IL

WE EARN OUR REPUTATION FROM THE COMPANIES WE KEEP.

Two Locations: Edwardsville & Swansea, Illinois

P: 618-257-8700 F: 618-257-8711

Greensfelder, Hemker, & Gale, P.C. www.greensfelder.com Offices in Belleville, IL St. Louis, MO Chicago, IL The choice of a lawyer is an important decision and should not be based solely upon advertisements.

David W. Ybarra Belleville, IL