The success of QE2

The charts above are from St Louis Fed president Bullard. The quick take on the QE2 policy is that it is working as expected. One, TIPS break-even inflation rates have increased from their lows. Two, stock prices have increased from their lows. The monetary eases has had the desired effect on financial prices. Three, real rates have increased, consistent with higher economic growth. All is good!

However, there is a potential problem when we look at output gaps. The story hear suggests that there may be less slack in the global economies than expected. If this is the case, there may be more room to tell a inflation story that could be less controlled. We may be early in the process, but this is the fear for many investors.