Fed fretting over deflation, ex-exec says.

NWANews.com. July 07, 2009.

Fed fretting over deflation, ex-exec says.

The Federal Reserve is more concerned about the possibility that the U.S. will suffer an extended period of falling prices than the prospect that the record budget deficit will fuel inflation, Alice Rivlin, former Fed vice chairman said Monday.

“The standard thought is if the budget deficit is very large, that’s inflationary,” Rivlin said. “But it’s only inflationary if the economy is functioning well, if we are … close to full employment. We’re not there now.”

Unemployment reached 9.5 percent in June, and the economy has lost 6.5 million jobs since the recession started in December 2007, U.S. Labor Department figures show. Gross domestic product contracted in the first quarter of this year, and the third and fourth quarters of last year, according to the Commerce Department.

The Fed is “much more worried about when will this thing turn around,” said Rivlin, a senior fellow in economic studies at the Brookings Institution in Washington. “Will we have deflation, and if so what can we do about it?”

The consumer price index, a measure of the cost of living, declined in May by 1.3 percent from a year earlier, the largest annual decline since 1950.

The Congressional Budget Office, which Rivlin helped organize in the 1970s, is projecting a record budget deficit of $1.85 trillion this year, as the recession reduces tax revenue and the economic stimulus plan increases spending.

“The Federal Reserve has to worry about where the economy is going, and the budget deficit is part of that,” Rivlin said. “Where you think it would come in most would be in terms of how much inflation to expect.”

On monetary policy, Rivlin said there’s little more the Fed can do with the federal funds rate, which has been in a range of zero to 0.25 percent since December.


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