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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