BOSTON, Oct 16 (Reuters) - Japan's experience shows that prevention may be easier than the cure when it comes to deflation, and monetary policy should respond actively before a downward slide in prices takes hold, a top Federal Reserve official said on Saturday.
Eric Rosengren, president of the Federal Reserve Bank of Boston, said that once deflation begins, it can be 'pernicious' and difficult to overcome.
'Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it,' Rosengren told the Boston Fed's annual conference.
U.S. inflation slowed more than expected in September even as retail sales picked up, keeping pressure on the Fed to act soon to lessen the risk of a downward price spiral.
'A gradual response may not be as effective as a more active response to arrest deflationary pressures before they become embedded in thinking that can affect household and business spending,' he said.
The Fed has already cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt.
The U.S. central bank is widely expected to announce a program to buy more government bonds at its Nov. 2-3 meeting as it tries to tackle high unemployment and uncomfortably low inflation.
Rosengren, a voter this year on the Fed's policy-setting committee, said lingering financial problems are a 'substantial' challenge for U.S. policymakers.
But, he said, monetary policy tools can still work.
'There are still important channels for monetary policy to use to mitigate the negative shocks,' Rosengren, one of the employment-focused 'doves' on the Fed's policy panel, said.
He said the first round of asset purchases was effective in bringing down long-term interest rates, adding that purchases may also work by signaling rates will stay low.
The impact of lower rates on the dollar -- which is falling as investors seek higher yields abroad -- is worth studying, he said.
Asset purchases could also boost bank lending, he said. As larger firms tap the capital markets at lower rates, banks would be freed up to lend to other firms, he said.
Rosengren said that any asset purchase program should be flexible.
'The scale of the program should be sensitive to the prevailing conditions, and the size of the program would need to vary to accomplish a particular interest rate outcome,' he said.
(Reporting by Kristina Cooke; Editing by Padraic Cassidy) Keywords: USA FED/ROSENGREN (kristina.cooke@thomsonreuters.com; 646-223-6154) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
Eric Rosengren, president of the Federal Reserve Bank of Boston, said that once deflation begins, it can be 'pernicious' and difficult to overcome.
'Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it,' Rosengren told the Boston Fed's annual conference.
U.S. inflation slowed more than expected in September even as retail sales picked up, keeping pressure on the Fed to act soon to lessen the risk of a downward price spiral.
'A gradual response may not be as effective as a more active response to arrest deflationary pressures before they become embedded in thinking that can affect household and business spending,' he said.
The Fed has already cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt.
The U.S. central bank is widely expected to announce a program to buy more government bonds at its Nov. 2-3 meeting as it tries to tackle high unemployment and uncomfortably low inflation.
Rosengren, a voter this year on the Fed's policy-setting committee, said lingering financial problems are a 'substantial' challenge for U.S. policymakers.
But, he said, monetary policy tools can still work.
'There are still important channels for monetary policy to use to mitigate the negative shocks,' Rosengren, one of the employment-focused 'doves' on the Fed's policy panel, said.
He said the first round of asset purchases was effective in bringing down long-term interest rates, adding that purchases may also work by signaling rates will stay low.
The impact of lower rates on the dollar -- which is falling as investors seek higher yields abroad -- is worth studying, he said.
Asset purchases could also boost bank lending, he said. As larger firms tap the capital markets at lower rates, banks would be freed up to lend to other firms, he said.
Rosengren said that any asset purchase program should be flexible.
'The scale of the program should be sensitive to the prevailing conditions, and the size of the program would need to vary to accomplish a particular interest rate outcome,' he said.
(Reporting by Kristina Cooke; Editing by Padraic Cassidy) Keywords: USA FED/ROSENGREN (kristina.cooke@thomsonreuters.com; 646-223-6154) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.