Economists: Deflation a risk for the U.S.
By Shihoko Goto
UPI Senior Business Correspondent
From the Business & Economics Desk
Published 3/25/2003 6:25 PM
WASHINGTON, March 25 (UPI) -- The U.S. economy continues to sputter as the war against Iraq intensifies, and some economists suggested Tuesday that there's probably room for further interest rate cuts to reignite growth, at least in the longer term.
Although the U.S. federal funds target is at a four-decade low of 1.25 percent, some analysts believe that with virtually no inflationary pressure, there's scope for further easing.
Some economists are more concerned about the possibility of the United States entering the same sort of deflationary spiral that has gripped Japan for years. Policy-makers are particularly wary of deflation, since expectations of price declines could keep businesses and consumers from spending.
"Deflation in the United States is possible," said Vincent Reinhart, the Federal Reserve Board's director of the division of monetary affairs.
Steven Kamin, deputy associate director of the Fed's division of international finance, noted that the Bank of Japan continues to struggle with a weak stock market, climbing unemployment and falling real estate prices -- all the result of its deflationary spiral. But he also said that neither the BoJ nor economists in any country had foreseen such severe deflation in Japan.
But Kamin argued that had the BoJ acted faster to cut interest rates, the country's economic downturn might have been milder.
"The BOJ hadn't loosened (monetary policy) enough ... an earlier easing could have eased the outcome," Kamin added.
The lesson, Reinhart and Kamen said, was that U.S. policy-makers should be vigilant for signs of deflation and act swiftly if needed.
"Going forward, the Federal Open Market Committee (the Fed's monetary policy arm) has scope for 125 basis points of easing if it viewed it as necessary," given the current Fed funds target rate, Reinhart said.
Also Tuesday, Fed governor Ben Bernanke told private-sector economists that the central bank should actually adopt an inflation targeting mechanism, particularly since it could potentially reduce market uncertainty.
"I believe that U.S. monetary policy would be better in the long run if the Fed chose to make its policy framework somewhat more explicit," the Fed governor said.
"A well-conceived and well-executed strategy of inflation targeting can deliver good results with respect to output and employment as well as inflation," he said.
Targets bring "increased accountability, reduced uncertainty and greater intellectual clarity," especially as price stability refers to both inflation and deflation.
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