Fed Member’s Deflation Warning Hints at Policy Shift

[Joanne98]

Source: NYT

WASHINGTON — A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy, amid increasing signs that the economic recovery is weakening.

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

Mr. Bullard had been viewed as a centrist, and associated with the camp that sees inflation, the Fed’s historic enemy, as a greater threat than deflation.



Read more: http://www.nytimes.com/2010/07/30/business/economy/30fed.html?src=busln

[Joanne98]

1. U.S. stocks fall on reports of Fed deflation talk

NEW YORK (MarketWatch) -- U.S. stocks fell to session lows Thursday after a Federal Reserve official said the central bank should consider bringing back a program to purchase government debt should the country appear headed towards a period of deflation. Federal Reserve President James Bullard made the comments in a paper released Thursday, the Associated Press and others reported. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,429, -69.02, -0.66%) fell 80.68 points to 10,417.20. The S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,097, -9.12, -0.82%) dropped 10.11 points to 1,096.02. The Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,236, -28.37, -1.25%) fell 29.84 points to 2,234.72.
http://www.marketwatch.com/story/us-stocks-fall-on-reports-of-fed-deflation-talk-2010-07-29?reflink=MW_news_stmp

[Joanne98]

2. Bullard Urges FOMC Purchase Treasuries If Deflation Risk Grows

July 29 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.

“‘The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released today about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

Fed policy makers are considering what actions to take, if any, to spur growth and reduce unemployment should the economy weaken further. Chairman Ben S. Bernanke told Congress last week the Fed could use communication to plot the path of interest rates, cut the rate it pays banks on excess reserves or purchase more bonds.

The Fed signaled last month that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.” The central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage- backed securities as the main tool for monetary policy.

http://www.businessweek.com/news/2010-07-29/bullard-urges-fomc-purchase-treasuries-if-deflation-risk-grows.html

[Roland99]

3. Well, gee. Ya think???

When corporate conglomos are sitting on billions in cash and not hiring workers (or at least paying them a decent living wage) and banks have tightened the valve so the credit trickling out has dwindled to that of a leaky faucet, what else would the outcome be??

[Downwinder]

4. What are they going to do, set a negative interest rate?

[Joanne98]

6. "quantitative easing program through the purchase of Treasury securities.”

[nyy1998]

7. Basically what joanne is saying

Is that they'll buy some more assets in order to pump more money into the economy. It's a good idea, but it is limited in effectiveness.

[Downwinder]

15. About as effective as buying your own stuff back on E-bay.

[nyy1998]

18. Essentially, it's the same idea

But it will pour some money into the economy. But we need more fiscal spending then anything else but we have all this faux rage on Washington about the deficit.

[DJ13]

5. Quick, throw more money at the upper classes!

Yeah, thats how you fix a consumer led recession.........

:sarcasm:

[saigon68]

8. What you mean it won't/will "Trickle Down" ?

[DJ13]

9. Wont

Never has, never will.

[saigon68]

10. Seconded

You Bet :-), :-)

[dixiegrrrrl]

11. And again with the myth of a "recovery".

I am so hoping more people are wising up to the cooked reports and figures that get pumped out via the MSM.

[Alcibiades]

12. Instead of purchasing assets, the fed should bolser hirng

Loans, and even grants, to small businesses and start-ups and state and local governments would do far more to counteract the risk of deflation than buying up financial assets. It's middle class consumers who are hurting, not the owners of assets.

I do wonder, though, if this talk of deflation is a smokescreen, used to justify a devaluation of the dollar so that we can inflate our way out of the debt crisis.

[Demeter]

13. Deflation doesn't lead to Devaluation--Inflation Does

But the balloon is so full of leaks, that no matter how hard they pump, they can't even get the slightest bubble going....

The Fed and the Treasury do NOT know how to fix the economy--and they don't want to. Because fixing the economy would mean pulling the loot from the bloodless hands of the Obscenely Wealthy and spreading it among the rabble, these Goldman Borg members will NEVER repair the broken money cycle. Money that piles up in a bank account NEVER cycles.

That's why we need the Estate Tax and the steeply progressive income tax back. That's why the cap must come off Social Security so that all income is taxed, not just poor people's.

We need tax reform like we have never had it.

[Alcibiades]

14. I know

Combating deflation could be one excuse for fostering inflation, pumping dollars into the system, bolstering demand but, at the same time, effectively decreasing the purchasing power of the dollar, both here and abroad. As imports became more expensive, domestic industry could get a boost, and increase hiring. The losers would be the folks who hold dollar denominated financial assets, mainly exactly the same people in whose interest the fed operates. The net effect would be hard to guess, as the fed would probably send signals--maybe this is one--that these folks need to adjust the allocation of their assets. Such a move would also mean that the rest of the world would move away from using the dollar as the reserve currency and denominating commodities in dollars.

I absolutely agree that the Fed operates in the interest of US and global financial interests. At some point, though, it becomes in their interest to devalue the dollar and foster inflation, because historically this has been the only way out for countries whose public and private debt reach unsustainable levels.

[Iowa]

17. Well said.

[lib2DaBone]

16. what I read from this.. Half the Fed admits that they are out of Bullets...

..and the other half are in denial. They are going to stick their heads in the sand as this whole stinking pile-of-crap economy sinks below the surface.

"A new round of asset purchases would have a smaller effect than the first round,” he said. “If the F.O.M.C. returns to asset purchases, to have a meaningful effect, they would have to purchase at least $2 trillion, doubling the balance sheet.”

If they don't believe we are in deflation.. they can have my house.. which is now worth half of what I paid for it in 2007.