Expanding the balance sheet by another $ billion to $ trillion over the next year, and perhaps keeping the balance sheet at $ trillion for the next several years, or increasing it even further, risks undermining the public’s confidence in the Fed’s commitment to long run price stability, a key element of its mandate.
While QE2 might work in clean theoretical models, I am less confident it will work in the real world. Again, I will note that the FOMC has never shown itself very good at fine-tuning exercises or in setting and managing inflation and inflation expectations to achieve the desired results.