Federal Reserve Chairman Ben Bernanke will do whatever it takes to avoid deflation and the main beneficiary of the Fed chairman’s policy response is likely to be President Obama and his re-election hopes, according to Thanos Papasavvas, the Head of Currency Management at Investec Asset Management.
“Our view remains that Bernanke will do whatever is necessary to avoid a deflationary spiral like Japan’s and a repeat of the policy mistakes made during the Depression,” Papasavvas said in an interview with CNBC on Thursday.
“Recent economic history shows us that policy makers know how to deal with and control inflation – but do not know how to resolve deflation," he said.
"Hence, if there is a potential policy mistake the Fed is willing to make it would be on the side of higher inflation (which it knows how to deal with) rather than the alternative,” he explained.
There is huge opposition to another round of quantitative easing and Papasavvas believes the Fed Chairman is flagging another move well ahead of time so that he can win support if the economy deteriorates further.
There would be resistance not only from within the Federal Open Market Committee to further easing but also from some politicians and academics, as well as from policymakers in emerging markets, he added.
“As a result we believe that he would contemplate QE3 only if we see further deterioration in the unemployment rate towards 10 percent,” Papasavvas said.
“As we have mentioned recently, the beneficiary from the Federal Reserve’s close monitoring of the state of the economy and ready to take extraordinary measures on any signs of further deterioration is Mr Obama,” he said.