The Fed Minutes from the October meeting were released yesterday, and the hot topic was the concern over deflation. This news caused stocks to tumble and investors to pour their money into the security of Treasury Notes.
Generally, the Fed has two jobs: the first is to promote economic growth and the second is to combat inflation.
And now deflation has come into play … Deflation occurs when prices drop, generally on account of the money supply and credit. So what’s the problem with falling prices? Well, it leads to declining employment because companies scale back on production and salaries.
In times of deflation, the Fed usually cuts interest rates, but these are unprecedented times, especially when you consider that the Fed has been cutting rates steadily since September 2007, a period that has been inflationary. Times of deflation also tend to bring lower mortgage interest rates as people take their money out of risky stocks and pour them into stable bonds.
