The American economy has sent more signals confirming that recovery is faltering. Two major data released on Thursday, Unemployment claims and CPI (Consumer price index), reveal that not only is the country dealing with low job recovery, but, it is also dealing with strong deflationary pressure. Weekly unemployment claims grew to 386 thousand per week (around 1.6% increase) and consumer price index fell by 0.2 %. Deflation is a rare event in modern economies; notable exception being the Japanese economy in the late 90’s. Given these data, the pressure is now on the Federal Reserve to act soon before the country plunges into another recession.

The Federal Reserve is given two mandates by the government of the United States; maximize employment and control inflation. To follow their mandate, the Federal Reserve usually employs interest rate action to affect inflation and unemployment. However, despite the record low interest rates, inflation is nonexistent and unemployment persists. The only alternatives left to the Federal Reserve is to either leave the markets alone and wait for stability, or announce another round of Quantitative easing (QE).

Analysts arguing for Quantitative easing claim that, given deflationary pressures, quantitative easing would have little long term inflation. On the other hand, a failure by the Federal Reserve to act now would certainly be taken badly by capital markets. The Federal Government is set to announce their new policies on June 19^th and there is no general consensus on whether QE would be announced or not. The effect of QE on commodities would be immense since the dollar, at a record high, would surely devaluate. Investors should definitely keep an eye on Gold, as previous rounds of QE have drastically increased its price.