Federal Reserve Members Continue To Speak Although There Is A Risk Of Deflation
Thursday, James Bullard who is the President of the Federal Reserve Bank of St. Louis decided a warning about deflation needs to be sounded. The Federal Reserve has tried throughout the whole recession to prevent inflation from happening. The economy might be weakened by a Japanese style deflation if, as Bullard predicted, the policies of the Federal Reserve continue.
Deflation happening instead of inflation
If a deflation were to occur, that would mean the prices of goods, services, homes, and stocks would drop. The New York Times reports the Fed has been focused on preventing inflation. $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. In order for this to be possible for the government, they had to print about $1 trillion. If the reserves were withdrawn and lent out easily, the supply of money within the economy could increase rapidly, thus triggering inflation.
Making deflation happen
Government debt was no longer bought by the Federal Reserve starting in March. Now the recovery no longer is in sight and inflation seems unlikely. Bank lending is contracting. Big companies pulled out their cash and are just waiting for things to get better now. Small business loans are almost obsolete. The Fed’s reserves won’t be entering the money supply anytime soon. Unemployment is high. Homes sales are nevertheless at record lows while they continue to fall. Bullard, as well as others, think deflation could be a possibility.
All about the Japanese deflation
The 1990s was when this deflation started. Asset prices fell following the 1980s real estate bubble burst causing more lending to be restricted. Cheap imports further lowered prices. The Bank of Japan made their mark by trying fix it with lower interest rates. The bubble’s collapse lasted for more than a decade with stock prices bottoming in 2003. Stocks went even lower when the global economy collapsed in 2008. In November 2009 Japan returned to deflation, as outlined by the Wall Street Journal. Later in the year, 2009, all of the consumer prices reduces about 2.2 percent.
‘Double edged sword’ for interest rates
Bullard is trying to convince everybody that deflation will continue and wants the Federal Reserve to take steps to stop it. Bullard thinks that the Fed promise to keep rates low for an “extended period” is a “double-edged sword,” reports the Associated Press. If individuals think inflation is going down, then deflation is likely to happen. Bullard has his opinions saying that the government debt needs to be bought along with lifting the interest rate cap so deflation doesn’t happen either.
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
