Central bank is concerned about falling prices


By DON LEE

CHICAGO TRIBUNE

WASHINGTON — The Federal Reserve on Tuesday raised direct concern for the first time that the nation’s economy may be headed into adeflation trap, andexpressed readiness to take more action to avert a serious turn for the worse.

In a statement issued after its seventh policy-setting meeting of the year, the central bank noted once more that economic recovery and employment growth have slowed in recent months. But this time the Fed made clear it also was worried about another potential problem: a downward spiral of prices that could undermine wages, hiring and overall economic activity.

Such a spiral is difficult to reverse, as Japan discovered during its so-called “Lost Decade” of economic stagnation in the 1990s.

Indeed, Japan still has not regained the level of economic vigor that made it one of the world’s strongest economies.

Besides the threat of deflation, the Fed is looking at an economy that isn’t growing fast enough to bring down the high rate of unemployment, which is at 9.6 percent and expected to edge higher in the coming months.

A core measure of consumer prices, excluding volatile energy and food costs, has been running at a little below 1 percent in the U.S. While that may be a good thing for consumers on a day-to-day basis, it is less than the 1.5 percent to 2 percent that Fed aims for to steer a course between inflation and deflation. Tuesday’s statement acknowledged that underlying inflation measures are “somewhat below” the Fed’s comfort zone.

Financial markets read a shift in the Fed’s statement on inflation as a sign that the central bank soon could launch a program of Treasury bond purchases, perhaps totaling upwards of $1 trillion.

On Tuesday, stocks shot up immediately after the Fed’s announcement but then fell back, with the Dowclosing up only 7.41 points to 10,761.03. The dollar slumped.