Friday, July 16, 2010

Fed's volte face sends the dollar tumbling,economy in decline, QE II to start soon?

The very respected Ambrose Evans-Pritchard writes in the Telegraph fom London:

"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."

I also note that "quantative easing" is mentioned in this article.

The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.

"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

This is a must read. Its a little long but compelling. Click on the heading above for the link.

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