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Central banks to the rescue! ECB plays "Boy Wonder" to Fed's "Batman"

Milanee Kapadia

Stocks are fluctuating to start the trading week, continuing some of the volatility that reigned last week.

Despite the volatility, the Federal Reserve appears to be holding its current course, and maintaining plans to wrap up its bond buying by the end of October, as expected. Dallas Fed President Richard Fisher said in an interview with CNBC this morning that he is not concerned about inflation, recent market volatility has not changed his view that QE3 should end next week as planned. 

Last week, St. Louis Fed President James Bullard bucked that idea. In an interview with Bloomberg TV, Bullard said the Fed should consider extending the program given falling inflation expectations. “We have to make sure that inflation, inflation expectations remain near our target, and for that reason, I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data-dependent, and we could go on pause on the taper at this juncture.””

Cardiff Garcia of FT Alphaville says Bullard’s views are not necessarily representative of all policymakers. He points out, “Bullard probably disagrees with the rest of the FOMC. I think they are more likely to use forward guidance measures such as keep rates lower for longer rather than say that this round of QE should be delayed.”

The central bank should be wrapped up with quantitative easing by the end of October. But Bullard said the completion of QE3 is data driven. Garcia says the data includes employment which has shown an uptick over the past few month. But he thinks, “What has changed is that inflation has moderated since the start of the summer and so have inflation expectations. It’s still running way below the Fed’s actual target, so if it’s going to take some policy measures, I think it has to address that specifically.”

Going off of that, Garcia says Europe is already in a deflationary state as the European Central Bank starts to take measures such as asset purchases. An ECB spokesman confirmed to Bloomberg News that purchases under the bank’s third covered-bond program started today. But Europe’s fractious nations, especially Germany, may stand in the way of the euro zone's struggling economy. Garcia says ECB head Mario Draghi will have to overcome those obstacles as he attempts to pull the EU out of its current state, as he “sees enough justification to be more aggressive and I suspect that he will be.”