Five years after US Federal Reserve Chairman Ben Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.
Fed policy makers now predict the US economy will contract until the middle of next year, according to minutes of their Oct. 28-Oct. 29 meeting released on Wednesday in Washington.
Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.
The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of US government debt, that he outlined as a board member in 2003, Fed watchers said.
“The Federal Reserve put deflation back on the table as a significant policy concern,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington.
“There does not appear to be any barrier to lowering” main rate below the current 1 percent level, he said.
Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.
“A lesson I take from the Japanese experience is not to let that get ahead of us, to be aggressive,” Bernanke’s deputy, vice chairman Donald Kohn, said in answering questions after a speech on Wednesday in Washington. “Whatever I thought that risk was four or five months ago, I think it is bigger now even if it is still small.”
Some policy makers saw a risk last month that the inflation rate will fall below their mandated goal of “price stability.”
“Aggressive easing should reduce the odds of a deflationary outcome,” they said, while noting that the low federal funds rate target “would pose important policy challenges” in that case.
The Fed’s actions so far, including unprecedented injections of liquidity, haven’t been enough to spur lending. Banks may make it even harder to get loans as their share prices plummet. Citigroup Inc closed at a level unseen since 1995. The Standard & Poor’s 500 Financials Index fell 12 percent to 139.84.
Fed officials expressed concern at last month’s meeting at the risk for “financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses.”
“Credit availability certainly hasn’t increased,” said Lyle Gramley, a former Fed governor.
“That has to be a major concern for the Fed because historically the way we get out of recessions is having the Fed push down hard on the accelerator. If that is not working very well, we have to look somewhere else for salvation,” Gramley said.
Future action by the central bank might include “aggressively buying long-term Treasury issues,” Gramley, a Washington-based senior economic adviser for Stanford Group Co, said in an interview.
Michael Feroli, a JPMorgan Chase & Co economist who used to work at the Fed, said the central bank could also purchase the debt of Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government in September.
“Before ramping up” such programs, the Fed might “first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period,” Feroli wrote in a note on Wednesday.
The Fed’s balance sheet has already doubled to almost US$2 trillion as officials introduced programs to inject liquidity into the economy.
ROLLER-COASTER RIDE: More than five earthquakes ranging from magnitude 4.4 to 5.5 on the Richter scale shook eastern Taiwan in rapid succession yesterday afternoon Back-to-back weather fronts are forecast to hit Taiwan this week, resulting in rain across the nation in the coming days, the Central Weather Administration said yesterday, as it also warned residents in mountainous regions to be wary of landslides and rockfalls. As the first front approached, sporadic rainfall began in central and northern parts of Taiwan yesterday, the agency said, adding that rain is forecast to intensify in those regions today, while brief showers would also affect other parts of the nation. A second weather system is forecast to arrive on Thursday, bringing additional rain to the whole nation until Sunday, it
LANDSLIDES POSSIBLE: The agency advised the public to avoid visiting mountainous regions due to more expected aftershocks and rainfall from a series of weather fronts A series of earthquakes over the past few days were likely aftershocks of the April 3 earthquake in Hualien County, with further aftershocks to be expected for up to a year, the Central Weather Administration (CWA) said yesterday. Based on the nation’s experience after the quake on Sept. 21, 1999, more aftershocks are possible over the next six months to a year, the agency said. A total of 103 earthquakes of magnitude 4 on the local magnitude scale or higher hit Hualien County from 5:08pm on Monday to 10:27am yesterday, with 27 of them exceeding magnitude 5. They included two, of magnitude
CONDITIONAL: The PRC imposes secret requirements that the funding it provides cannot be spent in states with diplomatic relations with Taiwan, Emma Reilly said China has been bribing UN officials to obtain “special benefits” and to block funding from countries that have diplomatic ties with Taiwan, a former UN employee told the British House of Commons on Tuesday. At a House of Commons Foreign Affairs Committee hearing into “international relations within the multilateral system,” former Office of the UN High Commissioner for Human Rights (OHCHR) employee Emma Reilly said in a written statement that “Beijing paid bribes to the two successive Presidents of the [UN] General Assembly” during the two-year negotiation of the Sustainable Development Goals. Another way China exercises influence within the UN Secretariat is
Taiwan’s first drag queen to compete on the internationally acclaimed RuPaul’s Drag Race, Nymphia Wind (妮妃雅), was on Friday crowned the “Next Drag Superstar.” Dressed in a sparkling banana dress, Nymphia Wind swept onto the stage for the final, and stole the show. “Taiwan this is for you,” she said right after show host RuPaul announced her as the winner. “To those who feel like they don’t belong, just remember to live fearlessly and to live their truth,” she said on stage. One of the frontrunners for the past 15 episodes, the 28-year-old breezed through to the final after weeks of showcasing her unique