Deflation Update

Saturday, May 10, 2003

The Fed's Unprecedented Move

As if to confirm my earlier point about the flagging rate of intelligence down at the Economist, the FT comes in with a hit, which, as is becoming habitual with them, is bang on target. Since both parties tend to cite the opinions of unidentified 'economists' one can only assume that those the FT asks have more idea of what is going on than those consulted by the Economist.

In an unprecedented move, which economists said underlined its concerns about deflation, the Fed split its usual assessment of the overall balance of risks to the economy into separate judgments on growth and inflation. The risks to economic growth - one of the Fed's key objectives - were balanced, the Fed said. But the committee said the risks arising from another fall in inflation meant the overall balance of risks to the economy was on the downside.The statement amplified Fed chairman Alan Greenspan's warning about low inflation last week. Mr Greenspan's favoured measure of inflation, the change in the core price index for personal consumption, recently fell to an annualised rate of just 0.9 per cent and the Fed has been anxious to head off any chance of inflation turning negative. Financial markets read the statement as a clear indication that the Fed was prepared if necessary to lower rates later in the year even if growth picked up. Following yesterday's announcement, the futures market priced in close to a 75 per cent chance of the Fed cutting rates at its next meeting in June, and bond yields also fell.........

On Tuesday, the Fed continued to argue that the US economic recovery should gather pace. "The ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets," it said. But economists have warned that with the sustainable rate of growth of the US economy now estimated at about 3 to 3.5 per cent, it needs a strong recovery in growth towards its potential to stop inflation falling further.
Source: Financial Times
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