August 27, 2002


Fear of a free fall : The Federal Reserve fights an unknown: the specter of deflation (NOAM NEUSNER, 8/26/02, US News)
For a quarter century, Federal Reserve policymakers have trained their sights on a single goal: making sure prices don't rise too much. Now, they need to be sure they haven't overdone it. Inflation, which used to be the Fed's chief nemesis, has evaporated amid a U.S. recession and global overcapacity. Prices for everything from butter to recycled glass to golf clubs are falling, triggering fears of a deflationary spiral. [...]

As their inaction suggests, the Fed governors aren't exactly ready to panic over deflation. For now, they may be right. Excluding food and energy costs, prices are rising at a 2 percent annual rate, and certain items–such as medical care and higher education–continue to get more expensive. But that's because consumers have little choice; you can't get an Ivy League education or American-quality medical care in Sri Lanka.

Be sure they haven't overdone it? They forced the economy into either recession or mere non-growth by raising interest rates into the teeth of a deflationary cycle. That's how the Great Depression was caused. Is that what we need before they realize they're fighting a problem, inflation, that was defeated twenty years ago and that with the end of the Cold War and the globalization of the economy shows no sign of returning in the near future? Posted by Orrin Judd at August 27, 2002 9:17 AM
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