The Federal Reserve President of St. Louis James Bullard has warned that current U.S. policy could lead to Japanese style deflation and that a new form of quantitative easing may be necessary, according to CNBC.
Bullard is recommending the purchase of government debt in an effort to stimulate the economy, and prevent a deflation style scenario, according to the AP.
Bullard blames the Fed’s extended low rate language partially for what could become a potentially Japanese style deflationary period, and that quantitative easing programs are the U.S.’ best weapon against this result.
In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deácautionary outcome within the next several years. To frame the discussion, I rely on an analysis that emphasises two possible long-run outcomes (steady states) for the economy, one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data I consider seem to be quite consistent with the two steady state possibilities. I describe and critique seven stories that are told in monetary policy circles regarding this analysis. I emphasise two main conclusions: (1) The FOMC is extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.
Markets are currently selling off in response, with today’s earlier losses accelerating on the announcement.