Fed concerned about deflation

Marketplace Contributor Jul 30, 2010
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Fed concerned about deflation

Marketplace Contributor Jul 30, 2010
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TEXT OF INTERVIEW

Bill Radke: The Federal Reserve may be turning its attention to a new threat: deflation. A new report from one of the regional Federal Reserve presidents says not to fear imminent inflation and increasing prices. Instead, the Fed needs to keep an eye on decreasing prices. Marketplace’s Janet Babin is here live. Good morning, Janet.

Janet Babin: Good morning, Bill.

Radke: The Federal Reserve is usually battling inflation. Why the shift?

Babin: Yeah, so James Bullard is president of the Federal Reserve Bank of St. Louis. He’s got a new report out that warns about deflation. And Bullard’s usually on the other side of the debate worried about inflation, so this could be a real turning point. Now Bullard says the financial crisis of course forced the Fed to keep interest rates at record lows, and this is could be, he says, a “double-edged sword” that could aggravate deflation.

Radke: But as a consumer anyway, don’t I kind of want prices to fall?

Babin: Well, it’s values that end up falling, like the housing market. Mark Vitner is senior economist at Wells Fargo, he explains the big problem with deflation is that if prices fall, companies need to reduce wages, but that’s hard to do in the U.S.:

Mark Vitner: What you wind up with is very high unemployment. And that’s probably the greatest risk from deflation right now, is that it would create a much deeper recession and it would be much hard for the United States to get back out of it.

So the Fed says this isn’t right around the corner, but deflation, now definitely on the Fed’s radar screen.

Radke: OK. Marketplace’s Janet Babin. Thank you.

Babin: Thank you, Bill.

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