Why the Risk of Deflation Worries the Fed
Lower prices may sound nice, but deflation can wreck an economy with pay cuts, lower profits and falling stock prices.
Lower prices may sound nice, but deflation can wreck an economy with pay cuts, lower profits and falling stock prices.
Major structural and cultural differences between the U.S. and Japan mean that Treasury bond investors simply using Japan as a template for how things will unfold here may be overlooking important factors. Key among them is a growing realization that Japan may have collectively opted for deflation.
Mired in deflation and stagnant for decades, Japan has been the economic basket case of the developed world. But the world's third-largest economy is getting an unexpected lift from roaring growth in emerging markets.
As the Fed's rate-setting committee prepares to announce its latest decision today, it faces a weakening economy and the growing threat of deflation. And it has to combat these potential menaces with interest rates already set near 0%. Here's a look at its options.
With talk of outright falling prices gaining steam in the U.S., it pays to reexamine what happened in Japan during its "lost decade." Turns out that Japan had several buffers -- including less dependence on housing -- that the U.S. is now lacking.




