Fed Heads Start Openly Conceding Risk of a Serious Deflation Spiral
What has been obvious to many of us (an uncomfortably high risk of a Japan-like, or even worse, an 1870s-90s-like deflationary stagnation/depression) is now in the publicly available Fed comments (and who knows what they have been and are really saying behind closed doors).
CNNMoney
Federal Reserve looks to battle deflation
NEW YORK (CNNMoney.com) -- Battling inflation has historically been a major aim of the Federal Reserve. But central bank policymakers now have an even bigger worry: deflation.
Prices have been slowing for three months. And members of the Federal Reserve openly voiced concerns about deflation at their last meeting...
While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices.
Businesses respond to declines in prices by cutting output and jobs. Why invest in making something to sell if the price you'll get for it will drop? Consumers hold back on buying for the same reason. The result is a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case...
One of the biggest worries among economists is that fighting deflation is much tougher than turning back inflation.
With its key interest rate already near 0% for the last 18 months, the Fed can't cut rates to spur the economy.
Until a couple of months ago, most experts assumed the Fed's next step would be to raise rates in order to reduce the risk of inflation. The central bank's next moves are now less clear.
"There's a tried and true policy response to inflation -- raise interest rates and eventually you'll win," said Mark Zandi, chief economist for Moody's Analytics. "We haven't had a lot of bouts with deflation, but in those battles, central banks have never won in a clear-cut way...
CNNMoney
Federal Reserve looks to battle deflation
NEW YORK (CNNMoney.com) -- Battling inflation has historically been a major aim of the Federal Reserve. But central bank policymakers now have an even bigger worry: deflation.
Prices have been slowing for three months. And members of the Federal Reserve openly voiced concerns about deflation at their last meeting...
While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices.
Businesses respond to declines in prices by cutting output and jobs. Why invest in making something to sell if the price you'll get for it will drop? Consumers hold back on buying for the same reason. The result is a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case...
One of the biggest worries among economists is that fighting deflation is much tougher than turning back inflation.
With its key interest rate already near 0% for the last 18 months, the Fed can't cut rates to spur the economy.
Until a couple of months ago, most experts assumed the Fed's next step would be to raise rates in order to reduce the risk of inflation. The central bank's next moves are now less clear.
"There's a tried and true policy response to inflation -- raise interest rates and eventually you'll win," said Mark Zandi, chief economist for Moody's Analytics. "We haven't had a lot of bouts with deflation, but in those battles, central banks have never won in a clear-cut way...