What’s the Story? Draghflation?

by CC June 6, 2012 9:06 am • Commentary

US futures were higher this morning, with many people pointing towards hope of new Fed action. The futures along with the Euro have since weakened based upon no news out of the Mario Draghi conference. He still seemed to be talking about inflation for some strange reason. This is pretty revealing into the Europeans’ mindset. With commodities crashing and a banking crisis imminent, I don’t think I would have lead the presser talking about inflation.

It’s like worrying about the water damaging the carpets on the Titanic.


U.S. stock futures lost much of their steam Wednesday after European Central Bank President Mario Draghi said the ECB would continue current easing measures through January, but failed to signal any new initiatives. And, the Labor Department said U.S. productivity fell more than initially estimated in the first quarter.


The European Central Bank will continue to conduct fixed-rate, full-allotment refinancing operations through January, ECB President Mario Draghi announced Wednesday. The non-standard operations are part of a long-running series of measures utilized by the ECB to ensure liquidity in the euro-zone financial system. Draghi, in an opening statement at his monthly news conference, said weakening economic data highlights growing uncertainty over the outlook. Draghi said the economy remains “weak.”


Asked why the ECB opted not to cut rates, Mr. Draghi said nominal rates still ‘very low’ with real rates negative. Recent weak data are from ‘soft’ survey data. Hard data have been better. But ECB stands ready to act, he said.


Federal Reserve Bank of Atlanta President Dennis Lockhart said a fragile recovery shown by the weak jobs report last week could require additional stimulus if it becomes clear growth is slowing.

Current policy is “appropriate” for now, Lockhart said in a speech in Fort Lauderdale, Florida. “Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered.”


The Fed’s next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn’t making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed’s options for more easing are sure to stir internal resistance at the central bank if they are considered.

Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its “Operation Twist” program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.