October 13, 2011
The NYT ran a piece on the divisions on the Fed over the future course of monetary policy with some members strongly supported more aggressive measures to boost the economy while others expressed concern about inflation. The piece noted that this division was in evidence in the last two votes by the Fed’s Open Market Committee, however it failed to point out the fact that it was closely tied to who appointed the members.
All five of the Federal Reserve Board governors, who are appointed by the president and approved by Congress, voted for stronger action. (Three of these governors are Obama appointees, one is a Bush appointee, and Chairman Bernanke was appointed by both.) The five voting regional bank presidents, who are appointed by the banks in their region, split 3 to 2 against stronger action.
The NYT should have called readers attention to this gap in voting patterns. Banks in general tend to be very concerned about inflation, since it erodes their profits, whereas unemployment does not directly affect banks.
The piece also told readers that deflation can be a problem because it, “can cause buyers to delay purchases, derailing the economy.” Actually, the likely rates of deflation that the economy might experience would have little effect in along these lines. For example, if prices were falling by 0.5 percent a year, this would mean that a person buying a $20,000 car could save $100 by waiting a year. This is unlikely to have much impact on their behavior.
The real problem is that inflation is lower than is desired. The drop from an inflation rate of 0.5 percent to a deflation rate of 0.5 percent creates no greater problem that the drop in the inflation rate from 1.5 percent to 0.5 percent. There is nothing magical about falling prices.
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