With risk of deflation, federal reserve member still speak

Thursday, James Bullard who’s the President of the Federal Reserve Bank of St. Louis decided a warning about deflation needs to be sounded. The whole job of the Federal Reserve during the recession has been to stop inflation. But Bullard cautioned that Fed’s current policies to stimulate growth are putting the U.S. economy at risk of falling into a Japanese-style deflationary cycle that could keep the economy weak for various years.

Deflation because of inflation prevention

A drop in goods, services, homes, stocks, and wages is what a deflation is by definition. According to the New York Times, the Fed has tried very hard to stop inflation from happening. $2 trillion was given to the country within the form of loans and government purchases beginning in 2007 when also making the interest go down to zero. To buy all those assets, the Fed essentially printed money — the $1 trillion in reserves. If the reserves were withdrawn and lent out quickly, the supply of money in the economy could increase rapidly, thus triggering inflation.

Deflation

Government debt was no longer bought by the Federal Reserve beginning in March. Since then, the U.S. economic recovery has faltered and also the threat of inflation is low. Bank lending is contracting. Many companies just have a ton of money sitting around. Small business loans are almost obsolete. The reserve money won’t enter the economy for a while. Unemployment is nevertheless really high. Home prices are going down and home sales appear to be at record lows still. Bullard, as well as others, think deflation could be a possibility.

All about the Japanese deflation

The deflation fist happened within the 1990s. Asset prices fell following the 1980s real estate bubble burst causing more lending to be restricted. The cheaper imports didn’t help as they caused prices to lower. Making benchmark interest rates go down was how the Bank of Japan tried to help. This continued for a long time including the stock market hitting its low in 2003. In 2008, stocks went down more and more. In November 2009, the Wall Street Journal reports that Japan had their deflation problem returning. Consumer prices fell in October 2009 by a near record 2.2 percent.

'Double edged sword’ for interest rates

Deflation warnings are being sounded by Bullard, a voting member on the Fed’s main policy-setting committee, as the Fed considers additional steps it should take to stimulate the economy if the weak recovery falls back into recession. Bullard thinks, as outlined by the Associated Press, that the Federal Reserve saying they would keep rates this low for an “extended period” of time is really a “double-edged sword. The pledge could make investors, businesses and ordinary people think inflation could possibly be heading lower, which could aggravate the risk of deflation. Bullard has his opinions saying the government debt needs to be bought along with lifting the interest rate cap so deflation doesn’t happen either.

Find more information on this subject

New York Times
nytimes.com/2010/07/30/business/economy/30fed.html?_r=1 and amp;src=busln
Wall Street Journal
online.wsj.com/home-page
Associated Press
google.com/hostednews/ap/article/ALeqM5hTlA7m2TuKuKz6FcqFx3b34S1lAQD9H8SA0G2