Real Deflation or the Fed is smoking something?

Discussion in 'Economics' started by trader99, May 17, 2003.

  1. TGregg

    TGregg

    Oops, so I did. Thanks zboy.
     
    #21     May 19, 2003
  2. trader99

    trader99

    Greenspan Says Fed to Watch Deflation

    Wednesday May 21, 6:12 pm ET
    By Caren Bohan


    WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan held out hope on Wednesday that the U.S. economy would pick up pace but warned the Fed was watching the threat of falling prices and would cut interest rates if necessary.
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    Although the Fed chief called deflation -- a broad fall in prices -- a minor threat to the U.S. economy, he said it needs close attention and "maybe" even central bank action.

    "We believe that because in the current environment the cost of taking out insurance against deflation is so low that we can aggressively attack some of the underlying forces, which are essential weak demand," Greenspan told Congress' Joint Economic Committee.

    While leaving the door ajar to lower interest rates, Greenspan suggested he was willing to be patient for now.

    He even raised the possibility the pickup could be robust.

    "It is at this stage unclear whether we are at a fulcrum of a fairly significant economic recovery," Greenspan said.

    Because Greenspan gave a cautiously upbeat view on growth, many analysts said the Fed might be willing to wait at least until its next meeting on June 24-25 before making a move. However, analysts said much would depend on upcoming data.

    Stock markets ended mixed as did the bond market. The dollar rose.

    The Dow Jones industrial average edged up 25 points at 8,516. The technology-laced Nasdaq Composite Index slipped 1.22 points, ending at 1,490.

    Greenspan called recent job and factory data "disappointing," but said these reports reflected caution around the time of the Iraq war. Thus it was "not unreasonable" to expect better economic times now the conflict has ended.

    PRODUCTIVITY, MARKETS GOOD OMENS

    The U.S. economy shed another 48,000 jobs in April, for a three-month total of more than half a million lost jobs.

    Greenspan said the Fed lacks a clear enough picture of the economy's postwar performance "to make a firm judgment" about where it is headed.

    He said the job cuts stem, at least in part, from employers' efforts to boost productivity by using technology and restructurings to save on staffing costs.

    He said productivity gains, combined with low interest rates and firmer stock prices, "augur well for the future."

    "In terms of policy I would conclude that Chairman Greenspan is willing to ease (interest rates) if he feels he has to, but has not drawn a hard conclusion yet," said Mike Moran, chief economist at Daiwa Securities in New York.

    "It will depend on the economic numbers due out in the next few weeks," Moran added.

    During questions from lawmakers, Greenspan gave a detailed assessment of deflation risk, the cloud on the economic horizon that has garnered hot market attention since Fed policymakers mentioned it in a May 6 policy statement.

    Underlying U.S. inflation is still in positive territory. But in April, it was running at an annual rate of just 1.5 percent, the weakest in 37 years.

    In his formal testimony, Greenspan merely echoed the May 6 warning that policymakers were watching the risk of "an unwelcome substantial fall in inflation."

    But he elaborated further later, saying deflation was "a threat that, even though minor, was sufficiently large that it does require very close scrutiny and -- maybe, maybe -- action on the part of the central bank."

    FED WELL-ARMED AGAINST DEFLATION

    With overnight interest rates now at a 1961 low of 1.25 percent, some economists have worried that the Fed could run out of tools to boost demand and thus ward off deflation.

    But Greenspan brushed aside such concerns.

    "We see no credible possibility that we will at any point ... run out of ammunition to address problems involving inflation or anything similar to that which disrupts our economy," he said.

    The Fed still could ease policy further even if the bellwether rate is close to zero, he said, adding that the central bank also has significant scope to lower long-term interest rates by buying bonds of longer maturities.

    For decades, the Fed has been waging war on inflation and has no recent domestic experience of falling prices to draw upon. Deflation has not been seen in the country on a sustained basis since the Great Depression of the 1930s.

    But Japan has been grappling -- largely in vain -- with falling prices since the late 1990s and has shown it to be a pernicious problem. A prolonged fall in goods prices can create a cycle in which profits and asset prices also drop. Consumers and businesses then become too fearful to spend or invest.

    Because of the hefty economic toll deflation can take, the Fed is studying the subject "extensively," Greenspan said.

    For now, though, prices are within a range the Fed has long considered ideal, allowing Greenspan to declare victory for now against his old foe of inflation. Inflation was "sufficiently low" that it no longer appeared to be much of a factor in the economic decisions of households and businesses, he said.
     
    #22     May 21, 2003
  3. trader99

    trader99

    I'm quoting from the article:

    "For now, though, prices are within a range the Fed has long considered ideal, allowing Greenspan to declare victory for now against his old foe of inflation. Inflation was "sufficiently low" that it no longer appeared to be much of a factor in the economic decisions of households and businesses, he said."

    Inflation is sufficiently LOW? Everywhere there's huge prices run up : housings, education, health care, etc. But perhaps, all these asset inflation will POP now?....
     
    #23     May 21, 2003
  4. Let's assume for a second that there is a "conspiracy". Here is an article that outlines it: the administration and the Fed want a weak currency in order to bolster our manufacturing sector. Maybe the powers-to-be believe that w/o a vibrant manufacturing sector (arguably weakened severely by a strong dollar which was in turn created by our continued deficits) our economy cannot really recover. Of course, the article goes on to warn that even if we boost our own economy through this methodology, we may bring down the world economy.

    I don't buy everything in the article: for example I don't think a relatively rapid 20% change in our currency can be explained by a "conspiracy". But I can believe that perhaps architects of our economy have switched their thinking. This would explain some of the feds/administration actions in recent month. Perhaps they think: "Nothing else has worked - let's try this."

    Anyway, here's the article:

    http://www.washingtonpost.com/wp-dyn/articles/A17601-2003May20.html
     
    #24     May 23, 2003