Central banks, deflation and you

During yesterday's trading session precious metal prices were battered lower, as the markets reacted negatively to the – perceived – ongoing inertia at the Fed and European Central Bank. Many investors are worried that these banks are being too reserved in their approach to the threat of deflation. More and more voices are calling for an expansion of the Fed’s bond purchasing programme. The US dollar is currently benefitting the most from this situation, as its external value continued to rise in relation to other important currencies. The euro slipped below the 1.30 mark in relation to the dollar, and experts predict that the European currency will continue drifting lower.
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... When asked about the action in gold, Sinclair stated, “Statements made by Mrs. Merkel, in Germany, this morning, would have us believe that both the US Fed and Germany’s influence on the ECB would result in a willingness to accept a severe deflation, rather than willingness to accept a severe inflation. The selling (in gold) sent some of the fundamental guys out of their positions in gold, which affected the technicals.”

... I firmly believe there is no political will on the planet anywhere, but especially in the Western world, to invite a severe deflation. As the deflationary forces continue to surface you will see the absolute opposite. I firmly believe you are more apt to have QE to infinity than you are to welcome rising unemployment and declining business activity.”
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Federal Reserve Chairman Ben S. Bernanke signaled he’s concerned Europe’s crisis will hobble a 2 1/2-year U.S. expansion that may need another boost from the central bank.

The Fed’s policy-setting panel, which met in Washington yesterday, said the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.” At the same time, the central bank added a reference to “apparent slowing in global growth,” and said that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

Bernanke and his colleagues may be considering more measures to aid growth and improve public understanding of Fed policy, which could be unveiled as soon as their next meeting taking place Jan. 25-26, said Julia Coronado, chief North America economist at BNP Paribas. The Fed reiterated that it expects joblessness to drop “only gradually.”

“They still see downside risks, so I still think they’re tilted toward easing,” said Coronado, a former Fed researcher who is based in New York. She said she expects a new round of asset purchases in the second quarter, or as soon as the January or March meetings should the economy deteriorate faster.
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Philadelphia Fed President Charles Plosser, Dallas Fed President Richard Fisher and Narayana Kocherlakota of the Minneapolis Fed, who all dissented from the August and September decisions to ease policy, don’t have FOMC votes next year, along with Evans.

In their place will be Cleveland Fed President Sandra Pianalto, Atlanta’s Dennis Lockhart, San Francisco’s John Williams and Jeffrey Lacker of the Richmond Fed. Lacker is the only official with a history of dissents. Williams is voting for the first time.
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