Cable Update (GBPUSD)

10/14/2009 4:11:30 PM

Federal Reserve State of Play - By Steve Beckner - 14 Oct`09
Despite ongoing talk about an eventual "exit strategy" there is no
realistic chance of any near-term exit from the Fed`s easy money policy.
Some imagined Chairman Ben Bernanke was sending a tightening signal last
Thursday. Not for the first time Bernanke broached possible use of
reverse repurchase agreements. And he reiterated that "at some point ...
as economic recovery takes hold we will need to tighten monetary policy
to prevent the emergence of an inflation problem down the road." But for
now he said "reserves are likely to continue to grow." And he again said
"my colleagues at the Federal Reserve and I believe that accommodative
policies will likely be warranted for an extended period."

Sunday one of next year`s Federal Open Market Committee voters
St. Louis Federal Reserve Bank President James Bullard told the National
Association for Business Economics "quantitative easing" poses a
"medium-term inflation risk" by increasing the monetary base. He said
that could theoretically lead to 7% annual inflation if not reduced. He
said "it is unclear whether the policy is ultimately consistent with a
steady state with inflation at target and output at potential" and said
"confusion" about asset purchases is "creating uncertainty in financial
markets." But Bullard said "we may be at the zero bound for awhile."

Speaking to the NABE Tuesday Fed Vice Chairman Donald Kohn said
"we must act well before demand pressures or inflation expectations
threaten price stability." But he made clear he is not expecting to act
soon. Calling a "V-shaped recovery" unlikely Kohn said "the difficult
conditions in labor markets and the consequent implications for
household incomes are important reasons for my expectation that the
recovery in overall economic activity moving into next year will be
restrained. The substantial rise in the unemployment rate and the plunge
in capacity utilization suggest that the margin of slack in labor and
product markets is considerable." Saying "financial headwinds are likely
to abate slowly" Kohn did not expect much of a housing rebound and said
"the extraordinary amount of excess capacity is likely to be another
factor tempering the rate of recovery."

Inflation seemed to be a minor Kohn worry. "Competitive pressures
on workers and firms have contributed to a substantial decline in
inflation" and "businesses have been aggressively cutting costs." He
added that "even as the economy begins to recover substantial slack in
resource utilization is likely to continue to damp cost pressures and
maintain a competitive pricing environment. I expect that the
persistence of economic slack accompanied by stable longer-term
inflation expectations will keep inflation subdued for some time."

"Indeed if inflation expectations were to begin to ratchet down
toward the actual inflation rates that we have experienced recently
inflation could move appreciably lower" said Kohn who twice repeated
his disinflation warning. He said he expects "inflation will likely be
subdued and that for a while the risk of further declines in
underlying rates of inflation will be greater than the risk of
increases." And again: "inflation expectations are more likely to fall