| The Next Battle |
12 May 2003
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Fed Voices Deflation Fear
To most people, falling prices does not seem to be much of a problem. In fact, it sounds like a great idea -- arranging fiscal and monetary policy so that prices come down. However, the latest Federal Reserve Open Market Committee Meeting voiced the fears of the governors that the US could be threatened with deflation, i.e., falling prices, and that it stands ready to fight. The Fed had better because the threat is real.
The problem of deflation has been a feature of the Japanese economy for years. Constant cuts in interest rates there have left real rates at virtually 0% for quite some time. Should America catch the disease, the entire world's economy would be threatened.
Unfortunately, the Fed has very little room for manuever. Interest rates are within a couple of cuts of zero. The US Federal budget deficit is fairly expansionary. What is lacking is demand, and making money available is only part of the solution. Somehow, the corporate decision makers and consumers have to be certain of the future before they will commit money, regardless of the cost of hiring it.
That is a real conundrum. The economic tools for restarting the economy are inadequate. Social and cultural changes have to be made in the realm of economics, but these will not be driven by the Fed or the national government. Individuals have to begin to feel secure again and to get away from the bunker mentality of the last year and a half. And no FOMC communique can make that happen.