St. Louis Fed President James Bullard said in research paper released today that the Federal Open Market Committee’s [FOMC] extended period language may be increasing the chances of a Japanese-style deflationary outcome for the U.S. within the next several years.
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” said Bullard, a voting member of the FOMC. ” According to Bullard, this uncomfortably close circumstance is, in part, due to the interest rate policy being pursued by the FOMC.
“To avoid this outcome for the U.S., policymakers can react differently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
Bullard stressed however, that the Japan-style deflation was not a done deal since it would take more negative economic shocks to tip inflation lower.
Read Bullards’ full paper here