To the Fed, Deflation is Like a Character in a Scary Movie

Most Federal Reserve Governors have recently been on the speaking circuit to explain the necessity of QE-3.

But you don't hear them talk about deflation.

Paul Vigna of the Wall Street Journal says they Fed does not like to mention the "d" word because they're afraid of facing it.

To the Fed, deflation is like a character in a scary movie. Vigna explains in this excerpt:

It's not really unusual for a spate of Fed speakers to hit the circuit on the same day, and there isn't much chance they're feeling any heat over QE3; the Fed's few hawks, including Kansas City Fed President Esther George, have been marginalized. The stock market loves it.

Still, wasn't the timing at least kind of curious?

The economy, at least traditionally measured, isn't in recession, although the growth that is visible is weak, and vulnerable. You can make a case the Fed is preempting the effects on the U.S. economy of a global slowdown that's becoming apparent by the day.

There may be something else the Fed (and other central banks, for that matter) are fighting, although they won't talk about it: deflation. To a central banker, "deflation" is like the Candyman (from the scary movie, not Sammy Davis). Say its name five times in the mirror, and it appears. So they never talk about it, even though they're well aware of its shadowy existence. They'd much rather talk about inflation, so much so people get that crammed in their heads, start expecting it, and plan against it; it's called managing expectations.

Doesn't mean deflation isn't there, though.

To read the entire article, click here.

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