James Bullard, the President of the Federal Reserve Bank of St. Louis, helped spook stock markets on Thursday when he warned in a research paper that the U.S. is close to entering a deflationary trap similar to the “lost decade” experienced by Japan. In order to stave off deflation, Bullard recommended further quantitative easing – the buying of Treasury notes by the Federal Reserve, essentially pumping extra money into the system – if the economy continues to slow.
Bullard is a voting member of the Federal Open Market Committee this year, which is the body that determines the Federal Reserve’s interest rate target.
In a conference call to reporters, Bullard made it clear that he did not unequivocally recommend further QE. Rather, he thinks it might be an important tool in some scenarios.
“The most likely possibility from where we sit today is that the recovery will continue through the fall, inflation will start to move up and this issue will all go away. Suppose we get another negative shock, another surprise. We have to be prepared in that event to have a plan in place to do something,” he told the reporters.
Quantitative easing has been hailed by some economists as a savior of the economy, while others have criticized for setting the stage for catastrophic inflation down the road, as trillions of dollars of liquidity are pumped into the system.
Bullard’s comments affected a number of asset categories and futures.
The dollar fell, slipping over 0.7 percent against the euro and over 1.5 percent against the Swiss franc. Equity index futures, already skittish, lost ground after a positive morning. Dow Jones Industrial Average Index futures dropped 28 points to 10,420, while Nasdaq 100 futures slipped 14.75 points to 1,855.
Many commodities benefited from the weaker dollar, though – in fact, almost every major type of commodity was boosted in Thursday afternoon trading. Sugar surged almost 3 percent, gold and silver both gained and Brent crude oil futures rose 1.87 percent to $77.48 per barrel.
The most spectacular rise of the day was put in by ICE Coffee “C” futures, which gained 3.5 percent to trade at $1.73 per pound of beans.
Once again, commodities showed their worth as a hedge against a dollar falling in value.
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.