Fed Guards Against Deflation

The Federal Reserve is already engaged in unorthodox "quantitative easing" and should prepare for the possibility that more extreme measures could be needed to guard against deflation, Don Kohn, its vice-chairman, said on Wednesday.

"We have already engaged in forms of quantitative easing," Mr Kohn told the Cato Institute, a think-tank. He said the US central bank should consider "what other forms of quantitative easing might happen as a contingency plan".

Mr Kohn said he believed the likelihood of sustained deflation was "still remote" but "less remote than it was". His comments followed the biggest monthly decline in US consumer prices for decades last month.

Headline consumer prices fell 1 per cent in October, though they were still up 3.7 per cent year on year. That decline was largely driven by a fall in energy prices, which helps the US economy rather than harms it and will not in itself trouble the Fed at all.

But the core inflation rate - which excludes energy and food - also turned fractionally negative in October, though it too was up 2.2 per cent year on year. If core prices declined for a sustained period of time, that would pose a serious threat to the US economy.

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Comments

[CaptD]

I'd like to suggest that the Fed also consider "jump starting" the recovery ASAP, here is how:

1. Allow each taxpayer to withdraw $10,000 per person or $20,000 per family from their IRA's TAX FREE in 2008 & 2009. This would be something that is easy to understand, fast to sign into law and would help our economy NOW.

2. Give home owners the same low rates that the big banks are getting so they can make their homes energy efficient using Solar panels and Solar hot water heaters. This will save the US much "wasted" energy and create jobs now.

3. Start increasing rates on Banks that are not loaning money out; it does no good to help bank if the Banks are not helping Americans get loans .

[rabiddog6708]

My brother is a long haul truck driver and he is having a harder time getting good runs because the merchandise is not moving out of the stores, thus it does not need to be replaced as often. This is as good as indicator of a recession as the average guy is going to see. The Fed can't really do much about deflation at this point...it's going to happen....just depends to what degree is the damage to business.

[MetryJen]

Hmm, lets think about this. Our economy is in shambles because people can't afford to buy the necessities AND pay the bills. Deflation would lower the cost of necessities, allowing them TO pay the bills.

And what part of that is bad?

Oh, right, the part where millionaires become billionaires because they're getting everyone's last red cent. Can't have THAT, can we?

[rabiddog6708]

Deflation can be just as bad as inflation. Prices lower because companies can't move their inventory.....this leads to decrease in profits....decrease in profits means less working capital for investment, expassion of the business and makes business less likely to replenish sad inventory when there's little or no profit to be made.....this leads to less merchandise being ordered....and these leads to less production to replace said merchandise....which leads to layoffs....which leads to less money to be spent....which leads to less items being purchased.....and so the chain of pain goes around and around....a downward spiral for the economy.

[yareallygotmegoin]

Carl Johan Calleman predicted the beginning of this economic collapse right down to the month , that it would begin. He's a respected Swedish Biochemist and cancer researcher. Whats amazing is he used his knowledge of Mayan Calendar cyclic repetition to do so. The good news is that based on the Mayan calendar each new era evolves 20 times faster than the previous era. With that in mind this , depression/recession should only last about 1/20th as long as the great Depression.

[FDRJFKLBJ]

Don't trust a word the Fed says. They're crooks and liars looking out for their banking cartel buddies. First they wouldn't admit that inflation was hammering the American people, even going so far as to stop publishing M3. Now they are lying about the "risk" of deflation. There is no risk of deflation. They are only making excuses for their uncontrollable money printing.

We are going to have an inflationary holocaust.

The Fed was created for the national banks, is run by the national banks, and is looking out for the national banks. Don't trust them.

[sposton]

It is time to abolish the Fed as we know it. The first principle ought to be that whatever replaces it should be owned by American people! Banksters will eventually offer us a false reform which would take the power to issue money away from us and give it to some newly minted supra-national body. Let's not fall for any more tricks from the banking cartel. They are taking us down to a complete disaster; the existence of our democracy (what is left of it) is at stake. Americans, what's happened to your revolutionary spirit?

[LesserOf2Evils]

There is a peaceful demonstration against the Fed planned this weekend.
http://endthefed.us/index.php
Cities all across the nation.

[sposton]

If we judge ourselves as we judge others we would realize we are already bankrupt. What has saved us (destroyed at the end) is the reserve currency status the dollar. Other countries must first accumulate foreign exchange to buy their oil; we own the printing presses. This has allowed our financial geniuses to abandon prudent economic policies for the financial casino capitalism. Each passed year "proved" to them right. That's like each step, while going backward, towards a precipice proves there is no precipice. Globalism induced structural imbalances could not go forever, and masking over the declining standard of living by easy credit could not last forever, either. We are experiencing now the beginning stages of the meltdown of the whole world economic order, not just the financial part of it.

Fighting stagflation is probably a good move but it ought to create jobs whose work must leave us a real value for society. Example is building the new sustainable energy infrastructure of wind, solar, etc. Blowing money on "investments" in financial companies will not do it. Do you think any of the two trillion dollars "created" by the Fed went into anything like investment in our infrastructure? We ought to resist the idea that spending for war making would be good because WWII has supposedly gotten us out of Great Depression. This is a different world and MIC is actually one of the major causes of our decline. Scale back our military involvement and commitment around the world now!

[MAH1952]

Unfortunately the unwashed and uneducated confuse the concept of money with the idea of value. Sure Reganonmics and the proceeding quarter of a century made even the people in trailer parks feel rich by making the dollar basically worthess. But the time has come to restablish the relationship between "money" and "value". What does it cost to make a product and then add on a resonable profit (not exceeding three figures) and that is the value of the product. To be realistic this will lead to a huge socio-political firestorm at first but when everything settles down I believe we will have a stronger, better country.

[Chavez08]

What IS "Slavery"?

[Chavez08]

Are you a slave?

[MetalCanuck]

This is what Ron Paul is warning about, they are going to try to prop up the bubble and by doing so they will cause mass inflation in the coming years..or sooner.

[Chavez08]

...then come the price controls.

Could a truly "Free" Market ever exist? (free of monopolies, robber-barons..)

[MetalCanuck]

It did for awhile...well almost (after civil war till 1907-13)

[MetalCanuck]

These idiots are going to destroy the dollar. Deflation has to happen now, it helps the poor. The reason there is deflation because the prices are too high for people to afford for gods sake.

[Trebor1]

You are right - the reason we are in a recession is because not enough people can afford to buy what can be produced. That is the result of giving all the money to 2% of the population, then waiting to see what would trickle down. Two percent of the population can only buy a small percentage of goods, relative to the worlds production capability. Then, they decided to cut the workers' wages so this 2% could make more and more money.

Alot of peckerwood wage workers went along with this idea because of the corporate media: they were brain-washed into believing they would all be 401(k) millionaires. The Stiock Market was propped up for years simply because all the new money flowing in served to raise prices. And, in certain parts of the country home equity amde them feel rich. But many had to continually tap the equity to keep up their lifestyles.

Now, they have no pension, whine they can never retire. have reduced health care, and a house decreasing in value. I hope all you working class people, you "Reagan Democrats," who went along with your "Free Market" buddies for the last 30 years are happy now!!!

[MetalCanuck]

This is not a freemarket, we never had one.

[DrJohnS]

Money tends to accumulate at the top, so by giving "bailout welfare" to those at the top this trickle down notion has cut out the middle man; the working man. Buy economic growth depends on a completely different approach; let's call it "percolate up" economics. Money injected at the bottom travels far and wide creating jobs and products and services before reaching the top where it is stored (so let's tax the heck out of the top and pull money back to the bottom!).

[Dianekkdi]

I remember bread at .30 cents a loaf. It now ranges from$2.45 to $3.50. But, now you are telling me the deflation of prices is bad? My lower costs at the market are only temporary feel good falsities? Incomes have been stagnate for American workers for a very long time--you know that don't you?

None of this makes sense. If I was reading George Orwell, well then maybe...I could understand.

It was Nixon who took us off the gold standard wasn't it? It was Reagan who gave us trickle down economics wasn't it? These republicans don't seem to do so well when it comes to economics for the country as a whole.

I think they need to stop. Bush has done enough damage. Can we put a restraining order on him?

Let Barack Obama and his team get in office. We'll go from there.

[JustAHumanOnEarth]

Deflation feels good to the consumer until he/she is layed off because his company had to cut production due to falling prices(with no increase in demand). Deflation leads to layoffs which leads to more deflation which leads to more layoffs, a cycle that is as difficult to stop as the inflation era in the early 80's.

The real overnight rate for banks is at about 1/4% even though the fed target is 1%. This is good for the banks since they can get money cheaper and lend it to you at a plus prime rate. This increased spread gives the banks an incentive to lend and help ease the credit crunch. Lowering the published target rate won't help ease deflation since the real rate is at 1/4% and can't go below 0%. Lowering the published rate will only narrow the spread for banks and remove the extra incentive to lend.

Bottom line....there is no good answer. I've been an economist for a long time and have never seen the fed in a near panic like this. I'm very, very concerned.

Deflation has already hit us in our homes and savings, now it's going to take our jobs...at least gas is getting cheaper.

I'd tell everyone to "hunker down" and save some cash but that would only make the economy worse.

Hang in there everyone.

[VivaZapata]

basically, it sounds like you're saying stir what's in the toilet but at no point, flush it, but with each cycle, retirement packages get weaker and weaker.

[Trebor1]

He is getting laid off now

[bushflipflops]

The answer is increased government spending. With the prime rate effectively at zero, if banks aren't willing to ease lending to increase the money supply then the government will have to spend more money to halt deflation.

[VivaZapata]

What kind of idiocy is this? Don't they get that people are unable to buy the basics anymore? Food costs skyrocketed. They need to come down as does the federal reserve.

[redraspberry]

The FED is the problem. They've inflated the dollar 96% since their inception in the role of "protecting" the value of the dollar. It could use some serious deflation.