Fed Worried in 2002 About Deflation

WASHINGTON (AP) -- Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half point in November 2002.

The transcripts, released Friday, show then-Federal Reserve Chairman Alan Greenspan and his colleagues were concerned about a sluggish recovery from the 2001 recession and the possibility that the country could tumble into a period of deflation, or falling prices.

Greenspan expressed concerns about the country falling into a "deflationary hole."

"It's a pretty scary prospect and one that we certainly want to avoid," Greenspan told other members of the Federal Open Market Committee.

The Fed did cut the federal funds rate, the interest that banks charge on overnight loans, by a half point, moving it from 1.75 percent down to 1.25 percent, the lowest level in 41 years.

The United States last experienced a prolonged bout of deflation during the Great Depression of the 1930s. But Fed officials worried that the country could fall into the same problems that Japan faced in the 1990s - a decade of falling prices and a stagnant economy.

The Fed would cut the funds rate one more time the next year, pushing it to a 45-year low of 1 percent on June 25, 2003. The central bank left the funds rate at that level for an entire year until it began a gradual move to raise rates in June 2004.

Some critics have argued that there was never a serious threat that the United States would experience a bout of deflation and that the extremely low interest rates engineered by the Fed created a housing boom in this country that drove prices and sales up to record levels only to burst in 2006, sending shockwaves through the economy.

While the Fed releases minutes of its closed-door discussions three weeks after the meetings are held, the full transcripts are only released after five years.


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