Inflation – Deflation – What Does It Mean To The ECB & The Fed?

Traders did not have much reaction to the much awaited FOMC meeting minutes release late on Wednesday.  The Fed’s seem to remain on course and do not seem to be worried about inflation missing its 2% target due to the drop in oil prices.  The Bloomberg team of Condon and Kearns reported that most Federal Reserve officials agreed their new policy guidance means they are unlikely to raise interest rates before late April, and a number expressed concern inflation could remain too low, minutes of their December meeting showed. In their discussion, Fed officials appeared upbeat about the outlook. They noted that upside risks “nearly balanced” the gloomy international outlook. The U.S. economy may end up showing more momentum than expected, several officials said.

The US dollar remained in the green at 92.28 up by 42 points. The pair eased a bit after the release but not enough to be notices. The euro remained in the red at 1.1830 down 59 points for the day as Greece and inflation weighed heavily on the shared currency.

Gold was the most active commodity after the data release, bouncing from 1206 to 1214 within a few minutes only to return to its low end of its daily trading range around the 1210 price.

The ongoing battle between Germany and the German central bank with the ECB and Greece continued to stress markets. The German central bank is trying to push Greece out of the euro and they are taking aggressive action while the head central banker and his staff are pushing Mario Draghi to ease off of bond purchases and stimulus. Promoting a possible Greek exit from the euro zone, Germany and France are taking a coordinated and calculated risk in the hope of averting a leftist victory in Greece’s general election on Jan. 25.

The intention, according to Michael Huether, head of Germany’s IW economic institute, is to make clear that other euro area countries “can get on well without Greece, but Greece cannot get on without Europe”, and to warn that the left-wing Syriza party would bring disaster on the country. Syriza leader Alexis Tsipras, whose party leads in opinion polls, insists he wants to keep Greece in the euro. Events in Greece will also strengthen the growing political resistance in Italy and France to German hectoring and fiscal austerity policies.

Italy’s struggling center-left government could be pushed into a closer cooperation with virulently anti-German center-right political units controlled, or strongly influenced, by the former Prime Minister Silvio Berlusconi. That means that Italy’s shift toward looser fiscal policies – and toward a resolute opposition to German-backed Russian sanctions – is very much on the cards.

The other problem facing Europe was today’s low inflation print. Inflation in the Eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier. The fall into deflation adds pressure on the European Central Bank to take further action to stimulate the bloc’s economy.

The central bank is increasingly expected to launch a new round of economic stimulus measures, or quantitative easing and the latest numbers will cement expectations. However, Germany reportedly opposes more QE. The situation in Greece also complicates the issue. Deflation increases the debt burden, and Greece’s indebtedness to its international bailout creditors is a key issue in the current general election campaign.