Fed President Cranks Up Deflation Fight

I wrote about a year ago how I could not understand where inflation would come from as all I saw was excess capacity in everything from factories, to houses to roads that are empty to commercial real estate that is empty.

So now we the fed is worried about deflation mmm!


Aivars


Fed President Cranks Up Deflation Fight


By MICHAEL S. DERBY

BOSTON—Policymakers must act vigorously to counteract the risk of deflation, a Federal Reserve official said Saturday at a conference conducted by the Federal Reserve Bank of Boston.

"A policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy," Eric Rosengren, president of the Fed bank, said.

"Should deflation occur, it can be quite difficult to overcome," he said in a speech to be delivered at the conference. "Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it," Mr. Rosengren said. "Financially fragile economies may be particularly vulnerable to negative impacts from premature austerity measures."

The conference, attended by people from academia, Wall Street and the Federal Reserve, was designed to impart an understanding of how to conduct policy in a low-inflation environment.

The Fed is confronting a weak economy beset by ebbing levels of core inflation and persistent high levels of joblessness. Most believe that the Fed will address this through a resumption of its buying of long-dated assets, as part of a bid to drive down borrowing costs and fuel more economic activity. There are other strategies the Fed may employ, but it is the asset-buying that is that the center of Wall Street's attention right now.

Mr. Rosengren expressed confidence that asset purchases can still be effective. He said research supports the view that such action "can influence the market rate of the asset being purchased."

"The scale of the program should be sensitive to the prevailing conditions, and the size of the program would need to vary to accomplish a particular interest-rate outcome," he said.

While most expect the Fed to buy Treasurys, the central banker said that focus may be misplaced. "The precise focus of the program's asset buy may be less critical than the broader fact that the central bank is purchasing long-duration securities, and that rates on all long-duration securities will be impacted by the program."

Write to Michael S. Derby at michael.derby@dowjones.com