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.
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