ST. LOUIS, July 29 (UPI) -- Federal Bank of St. Louis President James Bullard warned Thursday that the U.S. economy could be headed toward a sluggish period marked by falling prices.
Deflation can set the economy on a prolonged downward spiral, as it leads to smaller profits for companies, which leads to layoffs. In addition, consumers put off spending, as prices could improve if they wait. That further disables the economy.
In an executive summary of Bullard's manuscript, "Seven Faces of 'The Peril,'" the St. Louis Fed branch said, "the Federal Open Market Committee's extended period language may be increasing the probability of a Japanese-style deflationary outcome for the United States within the next several years."
The Federal Reserve has consistently issued statements to the effect that it would keep its monetary policy at historically low levels for "an extended period." The bank-to-bank lending rate is currently set at zero to 0.25 percent.
Japan from 1981 through 1991 suffered through an economy-stalling deflationary period.
Bullard, who is on the FOMC, warned that low interest rates could prompt deflation. Further, "Promising to remain at zero for a long time is a double-edged sword," the summary explained.
"This policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise and that this will eventually lead the economy back toward the targeted equilibrium," the statement said.
On the other hand, "It is also consistent with the idea that inflation and inflation expectations will instead fall," Bullard argues.
