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This could occur if inflation raged out of control or if the opposite problem
-- deflation -- emerged. Deflation is a prolonged drop in wages, prices and the value of assets like stocks and houses. The United States last suffered serious deflation during the Great Depression of the 1930s. But Fed policymakers think the risks of deflation can rise as inflation dips below 2 percent. They want to avoid following the path of Japan, which has struggled with weak growth and deflation for more than two decades. Economists don't think the latest economic data will lead the Fed to step up the size of its bond purchases. But they say the figures should embolden the majority of officials who back Chairman Ben Bernanke's commitment to keep borrowing rates down until the economy shows sustained improvement
-- as long as inflation stays low. "The Fed can't wink, scratch its nose, wiggle its ears or do anything that would signal they are about to change policy from what they are doing now," says Brian Bethune, an economics professor at Gordon College in Wenham, Mass. "That would be totally premature." Bethune says the Fed needs to be especially cautious in signaling any policy shift because the U.S. economy has been serving as a global engine of growth. Many European countries are still struggling to escape a recession that followed the region's debt crisis. "Anything the Fed did that could disrupt things or create uncertainty could tip the whole global economy back into recession," Bethune says. Few expect the central bank to start raising short-term rates before late 2015 or early 2016. And many economists think the Fed will keep buying $85 billion in bonds each month for the rest of this year, before starting to curtail its purchases in early 2014. Still, some analysts say that if the economy emerges from a slowdown caused in part by the government cuts and starts accelerating, the Fed might taper its bond purchases by fall. Whenever the Fed does decide to signal a potential pullback of its aggressive credit easing, after a long period of record-low rates, analysts say the shift could jolt investors. "No one can predict how much financial market instability we are likely to get when the Fed finally begins pulling back," Jones says.
[Associated
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