Not Content With Sitting On Its Hands, The Fed Now Baffles and Misleads Us On Deflation

(MoneyWatch) 
Ben Bernanke has refused to acknowledge the serious threat of deflation. Now the Federal Reserve is misleading us about what its members say in private. Or maybe they're just confused. Either way: terrifying.

From the Fed minutes of its Aug. 10 meeting, we have this:

While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat.

If you groaned when Bill Clinton asked "what the definition of 'is' is," then cue that noise! First, with inflation scraping the bottom of the barrel, "further near-term disinflation" would put us in deflation. Second, at least one member has seen the risk of deflation -- James Bullard, president of the Kansas City Fed. Bullard sees, according to the executive summary of a recent paper bearing his own name, current Fed policy is "increasing the probability of a Japanese-style deflationary outcome for the U.S. within the next several years." (And yes, Bullard was present at the meeting.)

Then there's this line in the minutes:

Participants viewed the risk of deflation as quite small, but a number judged that the risk of further disinflation had increased somewhat despite the stability of longer-run inflation expectations. One noted that survey measures of longer-run inflation expectations had remained positive in Japan throughout that country's bout of deflation.

So a "quite small" risk is not an "appreciable" risk? If it's not appreciable, then how, pray tell, can we label it "quite small"? This line also bears the hallmarks of a note-takers euphemism for a debate, or even a collegial argument. One person said that we're looking at deflation because the inflation rate is going to fall further, into negative territory. Somebody else said, "but hey, inflation expectations" -- a measure of future inflation -- "are still above deflation." Then the first person responded, "that happened in Japan, too."

The debate also tells us that someone on the Federal Open Market Committee sees a real risk of deflation -- enough that he or she was willing to make an argument. I've written before about how the Fed undermines its own credibility by talking at cross-purposes. Now its own minutes reflect that.

The Fed needs to change course, before its own credibility dwindles enough that, when it does, nothing happens.

Related:

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• Fighting With Itself, The Fed Does Damage to Its Credibility As Economy Suffers
• Bernanke Gives Us the Evidence For Further Action, But No Clear Endorsement Of It
• Draw Ben Bernanke Out on the D-Word: Is Deflation Near