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Federal Reserve To Start The Deflation Fight Next Week, Expert Claims

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Paul Sheard, Nomura's chief global economist, argues that the current conditions are ripe for the American central bank to take affirmative action to put the US recovery back on track.

In the first call of its kind from a Wall Street economist, Mr Sheard says that given subdued growth and concern about inflation, the Federal Open Markets Committee will act when it meets a week today.

His comments follow those of James Bullard, president of the St Louis Fed, who last week said the central bank needs to equip itself with a plan for further quantitative easing should it be required, and after the latest US growth figures showed the American economy deteriorated somewhat in the second quarter.

The Fed is thought unlikely to make any change to its base Federal funds interest at the meeting, which has been held at a range of 0-0.25pc since December 2008.

"We now believe that current conditions have moved policymakers into action and that the FOMC will adopt a more accommodative stance at its 10 August meeting," Mr Sheard wrote in a research note. "We expect the Fed to at least stop the passive contraction of its balance sheet."

Such a step is one of three possible options the Fed has in its arsenal, as outlined by Ben Bernanke, chairman of the Federal Reserve, before the US Congress last month.

The other two are restarting the asset purchase programme that ended in March, and changing the language in the FOMC's statements to make it clear deflation will not be tolerated.

However Mr Sheard argues that stopping the Fed's balance sheet from contracting further seems a sensible move.

"To the extent that the size of the Fed's balance sheet matters, this, in effect, amounts to a gradual tightening of monetary policy. Further shrinkage of its asset holdings now seems inappropriate in light of downside risks to growth," he continued.

Concerns about the health of the US economy shone through in the fate of the dollar yesterday, with the dollar index – which values it against a basket of currencies – hitting a three-month low on fears that US recovery is stalling.

The index touched 81.354, as sterling hit a six-month high against the greenback, touching $1.5820.

A string of recent disappointing US data was to blame, along with fears over the latest US unemployment figures, to be published on Friday.

The dollar failed to be revived by news that construction spending rose 0.1pc in June, thanks mainly to a 1.5pc increase in public spending on infrastructure projects.

The drip feeding continues from the "experts" that the recovery is stalling and action must be taken to make the unsustainable sustainable. If only they print more money all of our debt worries will disappear. Growth is easy to create all you need to do is print some high value currency and hey presto it's all fixed.

Still I'm sure it's all contained.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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