NEW?

The Fed Identifies a New Peril: Its May 6 statement hints at the dreaded "D" word -- deflation -- in assessing the hazards confronting the economy (Michael Wallace, MAY 6, 2003, Business Week)

To use the Fed's own words from the statement's key third paragraph, "the Committee perceives that over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal." By way of contrast, "over the same period, the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level."

Greenspan & Co.'s rhetorical gymnastics suggest that the "unanimous" policy agreement came following some dissent and heavy debate. In a sense, the Fed appears to have become a victim of its own success in vanquishing inflation.

The Fed's victory over inflation occurred in the 80's and came in concurrence with Ronald Reagan's breaking of the unions (PATCO) and the Soviet Union. Deflation has been the main risk ever since--thanks to: downward pressure on wages as a result of both the eclipse of industrial unions and globalization of manufacture; falling defense spending; technology driven productivity gains; fertility rate declines in the developed world; and various other factors. Fewer people are buying stuff that's made cheaper and national security (the only absolute task of government) is no longer much of a concern (the Islamicists, unlike the Soviets, pose no threat to the nation as a whole). Unfortunately, the Fed chairman has spent the bulk of his career worrying about inflation, and he seems unable to shift gears. If even he has finally recognized the threat, the Fed should have cut rates to zero and pumped money into the economy. It's a little late to adopt an observant posture. Posted by Orrin Judd at May 7, 2003 10:49 AM