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Fed more worried about deflation than inflation

The US Federal Reserve is more concerned about deflation than inflation, Wendy Edelberg, a Fed economist, said yesterday at a conference in Beijing. She added that this was her own opinion.

The Fed is “very worried about real interest rates being too high,” she told the Global Think Tanks Summit. The monetary authority “would be thrilled if right now the worry that it had was really inflation, and if it were really worried about seeing signs that the economy was about to be growing much faster than its potential growth rate.”

The Fed refrained on June 25 from lifting its target rate for overnight loans between banks, having kept it at zero to 0.25 percent since Dec. 16. It also kept unchanged the size of its asset-purchase programs after more than doubling the assets on its balance sheet to US$2.1 trillion during the past year, expanding bank reserves and beginning lending programs to bolster the financial system.

The Fed’s balance sheet is already starting to come down as those lending facilities are no longer as “attractive,” Edelberg also said, attempting to ease worries about the Fed’s “‘exit strategy” for its fiscal and monetary stimulus measures. The US economy is still “grim” even if there are stabilizing signs in other economies around the world, she said.

US Treasuries fell this year as the global financial crisis abated and the US government began selling a record amount of debt to fund stimulus spending and bank rescues. The yield on the 10-year note rose in the past two months 35 basis points, or 0.35 percentage point, to 3.5 percent yesterday, according to data compiled by Bloomberg.

Risk premiums, rather than inflationary concerns, have caused recent gains in long-term interest rates, Edelberg said.

“Investors are rediscovering their appetite for risk and they are getting out of Treasuries into other kinds of investments,” she said.
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