The Fed’s September 21 FOMC statement makes great tea-leaf reading. The Fed is worried about deflation. Reading between the lines, the Fed might be powerless to stop it. We’re not there yet, but it could happen. Eventually inflation – stagflation – may well be the problem, and the Fed might be just as powerless.
Traditional policies to fight inflation or deflation can all run out of steam. Creative new policies can work, but they need to be put in place before they’re needed. The Fed needs a Big Stick, and it doesn’t have one.
