This article was posted on Tuesday, Dec 01, 2015

By now everyone reading this knows that the Federal Open Market Committee (FOMC) decided to leave the Fed Funds rate unchanged at 0.00%-0.25%. That decision probably means the key interest rate won’t be raised until the Fed’s December policy meeting, or maybe not until sometime next year. As I discussed The Fed is concerned that inflation is not trending towards its 2% target, and may move even lower in the near-term. 

The Fed also voiced concerns over recent global economic and financial developments such as slower growth in China and other emerging countries, as well as sharp declines in the equity markets in most of the same nations. The Committee also worried that these developments could weigh on the U.S. economy at some point: “Recent global economic and financial developments may restrain [US] economic activity somewhat and are likely to put further downward pressure on inflation in the near term… The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.”

In addition to the decision not to raise the Fed Funds rate at this time, the Fed suggested that once it does raise the key rate, it will likely move very slowly with regard to subsequent increases. The Fed’s policy statement was quite dovish: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

As scheduled, the FOMC released updated economic, unemployment and inflation forecasts. The Fed downgraded its forecast for GDP each year through 2017. The good news is that the Fed expects the unemployment rate to possibly fall slightly below 5% in 2016 and 2017.

Most surprisingly, the Fed concedes that it could possibly be 2018 before the Personal Consumption Expenditures Index of inflation reaches the Fed’s goal of at least 2%. The forecast range for 2017 is 1.8% to 2.0%. The Fed lowered its inflation ranges for 2015 and 2016.

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In her press conference, Chair Yellen addressed the issue of the lower inflation forecasts:

“Inflation, however, has continued to run below our longer-run objective, partly reflecting declines in energy and import prices. While we still expect that the downward pressure on inflation from these factors will fade over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term.”

This is the Fed’s way of acknowledging that there is deflation in parts of the world that will contribute to lower inflation in the U.S. It will be interesting to see the minutes of the meeting (to be released next month) to see if the Committee actually discussed the subject of deflation – which is a central banker’s worst nightmare.

The Fed’s last two policy meetings this year are October 27-28 (no press conference) and December 15-16. 

Deflation: Why Falling Prices Are Bad For the Economy


As noted above, I think the Fed is worried about deflation. Yet most Americans living today have never experienced a widespread bout of deflation. In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).

A general decline in prices is often caused by a reduction in the supply of money or credit. Deflation can also be caused by a decrease in government, personal or investment spending. The opposite of inflation, deflation typically has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic recession or depression.

Central banks attempt to avoid deflation by manipulating monetary policy in an attempt to keep a widespread drop in prices to a minimum. Historically, the Fed has used monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Gently rising prices are thought to provide an essential lubricant for a sustained economic recovery.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, factory closures, shrinking employment and incomes, and increased defaults on loans by companies and individuals. Deflationary periods can be both short or long, relatively speaking. Japan, for example, has been in a period of deflation lasting decades starting in the early 1990’s. The Japanese government lowered interest rates to try and stimulate inflation, thus far to no avail.

One might think that a general decrease in prices is a good thing, as it gives consumers greater purchasing power. To some degree, moderate price drops in certain products, such as food or energy or computers, do have some positive effects on consumer spending. Yet a widespread, persistent fall in prices can have severe negative effects on growth and economic stability.

Deflation typically occurs in and after periods of economic crisis. When an economy experiences a severe recession or a depression, economic output slows as demand for goods, services and capital investment drop. This leads to an overall decline in asset prices as producers are forced to liquidate inventories that people can’t afford to buy.

Consumers and investors alike begin holding on to liquid money reserves to cushion against further financial loss. As more money is saved, less money is spent, which further decreases aggregate demand. It can be a vicious cycle. This explains why deflation is a central banker’s worst nightmare.

It remains to be seen if our super-low inflation environment will devolve into deflation, and whether or not the Fed will be able to head it off. 

Federal Debt Totals More Than $107,000 Per Household

The U.S. national debt now stands at almost $18.4 trillion and rises every year. Of that gargantuan amount, about $13 trillion is “debt held by the public” (as opposed to the other approximately $5.4 trillion in so-called “intra-governmental debt”).

A new report from the Cato Institute this month calculates that the $13 trillion in debt held by the public amounts to approximately $107,000 per household in America, the largest ever. Even worse, this amount has doubled over just the last seven years!

According to Cato, financing government debt through tax collection creates distortions since much of federal spending goes to government subsidy and benefit programs, which reduce incentives to work and savings. It estimates that due to the bloated size of government “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”

Keep in mind that debt held by the public is only part of the total national debt. Many politicians and national debt number-crunchers argue that the $5.4 trillion in intra-governmental debt shouldn’t count toward the national debt.

I have long maintained that the intra-governmental debt – debt that government agencies owe to each other – should indeed be counted as part of the national debt. After all, these debt securities regularly mature and must be rolled over (i.e. – be repaid) just like the debt held by the public. If these debts are included, then the amount per household jumps to over $150,000! 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at