Dangerous dependency and global bargain

20 October 2010 By Ian Campbell

China s unexpected rate rise has unsettled markets wanting more stimulus, not less. Yet the modest move reflects stirring inflation in fastgrowing Asia. In the slowgrowing West, markets are counting heavily on more stimulus from the Fed. But that s not an absolute certainty.

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Charles Evans, president of the Federal Reserve Bank of Chicago, said on Oct. 19 that "a series of largescale asset purchases" were advisable "to recover the shortfall in inflation".

Mervyn King, governor of the Bank of England, said in a speech on the same day: "What is needed now is a 'grand bargain' among the major players in the world economy. A bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism. Exchange rates will have to be part of such a bargain."

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis and a voting member of the Federal Open Market Committee in 2011, said on Oct. 19: "My own guess is that further uses of QE would have a more muted effect on Treasury term premia".

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