With QE2 ending next month there is an expectation that the Fed’s balance sheet will come to a standstill at approximately $2.75 Trillion. Given the rise in the money supply and banks increasing their lending throughout QE2 the rapid expansion experienced during those months could place pressure on continue lending by banks and generate expansionary economic activity because of the decrease in the money supply. Some economists are torn between a continued QE program on the face of inflationary pressure or unemployment prospectus. The first argument has the CPI (Consumer Price Index) heading towards the lower levels of 5%, while the second item of unemployment is expected to remain 8.7% for 2011 according to the latest (May 13th) Bloomberg survey. Whichever item provides the strongest pressure if QE3 were to be implemented (And I personally think it will) the unveiling would occur before the January 2012 presidential election kickoff season. The pressure on the Treasury market after June could fold either way but there is enough buyers both institutional and foreigners to drive the market up and keep yields low. But many factors could come into play such as China’s growth, the IMF’s (International Monetary Fund) leadership change, and the Eurozone debt crisis plus that the number 3 has been notoriously famous in government such as the 3 branches of powers (Legislative, Executive, and Judicial).
Charts from: http://mises.org/daily/5299/The-Effects-of-Freezing-the-Balance-Sheet
