The
Federal Reserve has forecasted an inflation rate of less than 1% this year and less than 1.7% for 2010 and 2011, sparking debate about whether Chairman Ben Bernanke is doing enough to prevent a Japanese-style deflation.
The unusually low rate of price increases is attributable mostly to weakness in energy and other commodities prices, as well as overall economic slack, he told the Senate Banking Committee today.
At the same time, though, housing prices continue to decline, and delinquencies continue to soar, particularly among borrowers with subprime mortgages, according to the Fed’s semiannual Monetary Policy Report to Congress today.
And total household mortgage debt actually may have fallen last year — the first time that has happened in at least 50 years, the report said.
The Fed attributed that decline to “an environment of generally weak housing demand, falling home prices, tighter lending standards and rising foreclosures.”
As for overall inflation projections, a dozen of the Federal Open Market Committee’s 16 members lowered 2009 projections last month to between 0.5% and 1%.
“Mr. Bernanke has been very good at articulating the real and present dangers of a Japanese-style deflation taking hold in the [United States],” Desmond Lachman, a resident fellow at the conservative-leaning American Enterprise Institute of Washington, wrote today. “Yet as a central-bank practitioner, he has been all too tentative in addressing the country’s deflation risk head-on, which only has to heighten the probability of those risks materializing.”
Mr. Lachman, a former managing director with Salomon Smith Barney Inc. of New York and economist with the Washington-based International Monetary Fund, suggested that Mr. Bernanke set a formal inflation target of around 2% to signal that the Fed is “firmly committed to preventing deflation.”
Mr. Lachman also questioned whether U.S. monetary policy “does not now need to be more forceful” in light of the weak global economy.
The Fed report also showed that 13 of the 16 FOMC members projected 2010 inflation of between 0.7 and 1.6%. For 2011, 12 members estimated inflation of between 0.1 and 1.6%.
In the longer run, 13 members forecast inflation of 1.7% to 2%, the report showed.
Gasoline and natural-gas prices fell sharply in the second half of 2008, and the inflation slowdown was particularly sharp for motor vehicles, apparel and other consumer goods, the report said.
The variance in Fed members’ estimates for the next three years was substantially greater than it had been in October. This reflected the variety of assessments about the timing and pace of economic recovery, the sensitivity of inflation to slack in resource use, and the prevalence of downward wage rigidity, the report said.
Individual Fed members offered estimates with unusually high error ranges because of their uncertainty about the economic outlook, the report said.
