THE FED JUST KEEPS FIGHTING THE WRONG WAR:

Amid Pressing Problems, Threat of Deflation Looms (SUDEEP REDDY, 10/18/08, Wall Street Journal)

Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation -- generally falling prices across the economy, beyond volatile energy and food costs -- remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down to, and possibly even below, rates that I consider consistent with price stability."

Fed officials generally consider price stability to be an inflation rate between 1.5% and 2%.

The long term pressure on the economy remains, as it has been for nearly three decades, deflationary, not inflationary.

Posted by Orrin Judd at October 18, 2008 8:27 AM