Did you see it? On the front page of the Wall Street Journal, above the fold, above the picture of the dearly departed George Steinbrenner. In the article about the Fed.
“One topic under debate is the possibility that today’s already-low inflation may turn into a debilitating bout of deflation,” Jon Hilsenrath writes. Deflation. The boogieman, the specter from the Great Depression that haunts central bankers’ dreams. Yesterday, we noted that Boston Fed chieftain Eric Rosengren openly uttered that which must not be given name. Today, there it is again, right on the front page of the paper.
The Fed is expected to ratchet down its outlook for economic growth in the second half of the year today, when it releases the minutes of the June policy meeting. But that bloodless description doesn’t begin to get at what’s going on inside the central bank these days. Consumer prices are already in a state of disinflation, with prices rising but at a slower pace than previously. Outright deflation, where prices are flat-out lower, has appeared in bits and pieces, although it hasn’t made a full, bat-wings extended, screaming flyover the city appearance. That is, of course, what terrifies the Fed.
If the Fed, in its usual opaque manner, is letting it slip out to the public that one topic under “debate” is the “possibility” that deflation could appear, then I guarantee you that somewhere in a broom closet in the Fed’s marble headquarters, Ben Bernanke’s got a secret Cajun voodoo altar, with votive candles, incense and little deflation dolls full of pins in them. At this point, that may be, in fact, his best option for combating deflation.
The Fed isn’t some angry gaggle of noisy bloggers; they’re not going to scream their opinions. They do their best, in fact, to make everything they say — whether they’re talking about the biggest boom or worst bust in history — sound exactly the same: dull, flat, monotone.
It’s surprising to me that the Fed’s openly talking about it. Deflation is one of those things that has a large psychological element to it; the more you talk about it, the more people think about it, the more they react to it, and it becomes a self-fulling thing. Of course, there’s a large real element to it, as well, as anybody who’s living in an underwater house can tell you.
So if the Fed is talking about through the usual channels — the one outlier regional president, the favored reporter — then this is a real problem, not some hypothetical probability, and they know it.