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Fed Warns of Global Slowdown That Adds to U.S. Deflation Risk
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By Scott Lanman and Craig Torres


Jan. 29 (Bloomberg) -- Federal Reserve officials warned of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.

For the first time during the credit crisis, the Federal Open Market Committee’s statement yesterday indicated concern about the worldwide economy weakening “significantly,” with “some risk” that inflation would remain below ideal rates. The Fed signaled it’s moving closer to buying long-term Treasuries and expanding its $600 billion program to buy home-finance debt.

Chairman Ben S. Bernanke and his colleagues are focused on reducing a range of long-term borrowing costs to stem the longest recession since 1982. Policy makers, concluding a two-day meeting yesterday, left their target range for the main interest rate unchanged at close to zero and reiterated rates will be “exceptionally low” for “some time.”

“It’s just clear that the Fed is hoping to keep those long- term interest rates coming in a downward trend,” David M. Jones, president of DMJ Advisors LLC in Denver and a former Fed economist, said in an interview with Bloomberg Radio. “That’s the only way they can give aggregate demand a boost and help this economy at least start to get out of recession.”

U.S. gross domestic product will contract 1.6 percent, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent in 2009, the International Monetary Fund said yesterday. Inflation in advanced economies may fall to a record low of 0.3 percent this year, compared with a prediction in November of 3.6 percent, the IMF said.

‘Gradual Recovery’

The Fed statement yesterday said its prediction of a “gradual recovery” in the U.S. economy later this year has “significant” risks of failing to materialize. At their meeting, central bank officials gave updated forecasts for gross domestic product, inflation and unemployment that will be released with meeting minutes on Feb. 18.

“It sounds like the worry is not so much recession as it is depression,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We can only hope that the famous long and variable lags of monetary policy will eventually kick in.”