Fed Board Member’s Deflation Warning Hints at Policy Shift

Inquiring minds are looking at the warning of deflation by St. Louis Fed President James Bullard. Bullard has been more prescient than most on the board in seeing the near-term future.

James Bullard, the president of the Federal Reserve Bank of St. Louis, warned on Thursday that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy, amid increasing signs that the economic recovery is weakening. Mr. Bullard had been viewed as a centrist, and associated with the camp that saw inflation, the Fed’s historic enemy, as a greater threat than deflation.

Does this mark a distinct policy shift? Does this mean the chances of a pro-longed deflationary period have just increased?


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