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Perhaps Evans knows it. That inflation on a moderate scale is always a boon for growth and prevents the US economy from turning Japanese. That unemployment is a bane and can have political ramifications especially in ..

01 Oct 2012

By Rakesh Neelakandan
This morning, when the gold retreated in markets, nobody should have thought of a tsunami in gold prices invading the bearish sands.

The prices reached $1,794.40 an ounce, the highest for a most- active contract since Nov. 14 on Monday.

It simply happened and all it took was a few words from the President of Federal Reserve Bank of Chicago, Charles Evans. He maintained that unemployment probably will not fall to 7 percent until 2014 and that the Federal Reserve can do a lot more to boost the economy. He said that the Federal Reserve can back off from its easing drives if inflation presented a greater threat. The market interpreted this as impending series of inflation data and pounding hoofs of gold bull.

This announcement when broken down means a couple of things:

1. The US authorities consider it a top priority to rein in unemployment

2. The US authorities do not give a damn to inflation until it may rise to uncomfortable levels.

Perhaps Evans knows it. That inflation on a moderate scale is always a boon for growth and prevents the US economy from turning Japanese. That unemployment is a bane and can have political ramifications especially in the election year. Choose the one that apparently does not appear evil.

But it is also dangerous when central bank officials, thorough-bred economists, start talking politics.

Look at the nature of the third round of QE. It is a measure of buying mortgage backed securities or MBS from the markets on a monthly basis at $40 bn a month until the labour markets show substantial improvements.

What is this if not politics, one may argue.

The US authorities may resort to additional buying of treasuries too as and when the Operation Twist comes to a close by the end of this year.

All these measures, when added together mean a scourge emerging from thin air: inflation.

But herein lays the caveat: if inflation gets way too ahead of job creation and becomes a drag on the economy, the Federal Reserve may simply increase the lending rates or other umpteen tools with them to heal the economy.

The question is can inflation be reined in so easily after the economy has marched ahead in supersonic speeds.

In other words, is inflation so obedient a genie?

The debate, I think can continue forever. May be Bernanke could shed more light on the impending measures in today’s speech scheduled at 11.00 PM IST.

This time around, Ben Bernanke is expected to address the QE skeptics and may stress on two things: the QE 3 measure—the third round of Quantitative Easing wherein the Federal Reserve would buy mortgage-backed securities to the tune of $40bn a month until the labour markets recover —has the potential to work well and can be managed well. He will speak on ‘Five questions about Federal Reserve and Monetary Policy’.

Meanwhile gold prices retreated to 1780.5 levels on positive PMI data.


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