What is the Cantillon Effect?

When the US Federal Reserve and other major central banks embarked upon their quantitative easing programs shortly after the Global Financial Crisis many feared that the impact would be inflationary.

In an open letter to then Federal Reserve Chairman Ben Bernanke, twenty-three of the most recognised economists, investors and analysts outlined their concerns:

“We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.”

At the time the letter was published, the inflation rate was 1.5%. Four years later, in December 2014, inflation had fallen to 0.8%; in early 2015, it…