McTeer is a f8cking moron. Scroll down to the bold comments:
BC
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Reuters
Fed Officials Ready Anti-Deflation Plan
Wednesday April 2, 2:31 pm ET
By Tim Ahmann
WASHINGTON (Reuters) - Most Federal Reserve officials think the U.S. economy will revive once war doubts lift but with corporate pricing power hamstrung, they are still bracing to avert a threat they hope never arises -- deflation.
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While Fed policymakers have expressed confidence the United States won't suffer Japanese-style deflation, in which falling consumer prices drag the economy lower, part of that faith reflects a willingness to act aggressively if needed.
"We don't want to get into a position where we get extra headwinds in an environment where we're fighting some other headwinds and that underscores the importance of being ... aggressive and willing to act preemptively." explained Vincent Reinhart, a top adviser to Fed Chairman Alan Greenspan.
The U.S. economy hit a brick wall of war worries and bad weather in February, fueling concerns among some analysts that the stop-and-go recovery was in danger of stopping altogether. Early readings on March appear little better.
For its part, the Fed has blamed much of the weakness on disquiet about the U.S.-led war against Iraq and its potential economic impact, saying growth was poised to pick up once war-related worries ease.
Officials at the central bank are hopeful that the 12 U.S. interest rate cuts since early 2001 will be ample to stimulate faster expansion. But markets are not so sure.
"The Fed thinks they're done but the economic news is not really cooperating," said Bill Dudley, chief economist at Goldman Sachs. "The most likely thing is the Fed's on hold for the time being and we wait to see how the data, the war and the markets behave," he added.
While rising oil costs have pushed overall inflation up the past year, so-called core inflation, which strips out food and energy costs, has been slowing -- the Fed's favorite measure was up only 1.4 percent in the 12 months through February.
With core inflation low and the economy weak, some analysts see a risk the United States could end up like Japan, which has been in and out of recession since equity and real estate bubbles popped more than a decade ago.
WHAT DO YOU THINK WE'RE DOING?
With the benchmark overnight lending rate now at a 41-year low of 1.25 percent, the Fed has had to face the unsettling prospect that short-term interest rates alone might prove an insufficient tool if the economy weakened sharply.
Many analysts believe the central bank would be loath to cut rates to zero because that could cause problems in money markets, which count on a positive rate of return to function.
"That's an issue that's getting a lot of attention these days and we'd have to make that kind of judgment in the context of everything that might be happening," Richmond Fed President Alfred Broaddus told reporters this week, while stressing he did not see deflation as a near-term threat.
Like Broaddus, Reinhart made clear the Fed was conducting due diligence for a prospect he called "quite remote."
"You've seen the chairman testify (before Congress). A van pulls up and empties out with staff and they're all carrying briefing books. In an institution like that, what do you think we're doing?" Reinhart quipped when asked if the Fed had been giving more thought lately to how it might battle deflation.
Speaking at an economic conference last week, Reinhart laid out a number of tools other than short-term rates that could be used to fight deflation, from pumping money into the banking system to lowering long-term rates by buying U.S. Treasuries.
Officials express confidence such measures, while unusual, would prove effective, even while they admit a lack of experience makes it hard to gauge the likely impact.
"As long as you're pumping out money at a faster rate then demand for money is rising you're going to stimulate spending," Dallas Fed President Robert McTeer said in mid-February. "I think it would be kind of fun to fight deflation, actually."
Officials in Washington repeatedly stress that the United States is not like Japan, where banking system woes have complicated efforts to spur growth.
In Japan, falling prices have raised the burden of debt, adding to bad loans at banks and thus hampering new lending, which weighs on the economy and fuels more price declines.
Fed researchers say that if a deflation threat arose in the United States, the key to avoiding a Japan-type spiral would be to act quickly while the now-healthy banking system could still transmit the benefits of an easier monetary policy.
GOOD AND EVIL
Even if prices were to fall, all deflation is not created equal.
In December, one Fed official said deflation might not be so dire if it occurred when productivity -- or worker output per hour -- were rising rapidly, as it currently is in the United States. Since rising productivity cuts the cost of output, profits would be buffered even with falling prices.
Steven Kamin, a researcher at the Fed's Washington-based Board of Governors, said last week there was some merit to distinguishing between productivity-related "good deflation" and "bad deflation" caused by a collapse in demand.
Still, he warned the economy could easily tip from good deflation to bad if hit by a negative shock.
"The good part of good deflation is the productivity growth, it's not the deflation itself," Kamin said. |
