Market Overview

Ron Insana's Fed Fun: The Only Game in Town!

Ron Insana's Fed Fun: The Only Game in Town!
Related FED
Technical Analyst Sees Higher Interest Rates
Cramer: Trump's Federal Reserve Nominee Is 'Fabulous' News For Bank Investors

This piece contains the opinions of Senior Analyst and Commentator at CNBC Ron Insana that do not reflect the opinions of

While European Central Bank (ECB), continues to "study" how it plans to tackle deflation on the Continent, it seems the only truly responsible central bank in the world remains the Federal Reserve.

The ECB may already have waited too long to stop deflation from becoming a potentially intractable economic issue, as falling prices have already hit the continent.

The Bank of Japan, (BoJ) after decades of failed attempts, is still battling deflation, with only limited success, while deflation is quickly becoming in issue for the People's Bank of China (PBOC), as well.

Here in the U.S., the Fed quickly launched its Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) programs in late 2008, when it became apparent that the worst financial crisis since the Great Depression could hurl the U.S. into a deflationary spiral.

Thus, the U.S. avoided such an outcome, while the rest of the world now faces it, thanks to dithering monetary policy-makers.

Deflation Nations

Let's review the numbers: In the eurozone, prices fell year over year, as reported Thursday, confirming that deflation has already become an economic reality in the EU. Most of Europe is either bordering on recession, or already in one, complicating the task of the ECB, both in its "efforts" to boost growth and stop prices from falling.

In China, factory prices, or wholesale inflation, declined 3.3 percent year-over-year, raising the specter of a hard landing in what once was one of the fastest growing economies in the world.

Related Link: The Latest Investing Lexicon: "Deflationcy"

In China, abundance is not found only in the size of its population, but in its vast overcapacity, from manufacturing facilities to residential real estate. A bout of deflation in China could prove even harder to cure than in Europe, as there isn't much more infrastructure building China can use to boost economic output, and thus keep the economy growing. A growing economy puts upward pressure on prices, which is what ultimately cures a deflationary recession.

China already has 65 million unoccupied houses, ghost cities that house no one, bullet trains to nowhere, and so on and so on.

Japan's deflationary problems, meanwhile, are well-known. Inconsistent policies have served only to temporarily push up retail prices without accompanying growth, hardly a cure for a weak economy that has been battling deflation since the early 1990s.

Exacerbating Japan's economic troubles are demographic issues. Japan's population is falling at a faster rate than many anticipated, suggesting that demand for goods and services could fall with the declining birthrate, a complicating factor when population growth and and the size of the labor force are key components of GDP expansion.

Fortress America

Not to beat a dead thematic horse, but the U.S., at least at the moment, faces none of the problems plaguing other developed nations. While the U.S. birthrate is at the lowest level ever, as the Great Recession delayed the typical rates of family formations, the U.S. still has sizable population cohorts, from the back-end of the baby boom, to GenXers, to the Millennials (100 million strong) who can keep the economy humming for decades to come.

In addition, unlike the ECB, BoJ, or PCOB, the Federal Reserve has been sufficiently consistent in its anti-deflation policies that falling prices are less of a risk here than they are abroad.

True, inflation in the U.S. has been running below the Fed's stated target of 2 percent for almost three years, but inflation is not near zero, which is the bound from which few travelers return. However, for the most part, growth appears to be accelerating in the U.S., even as it stalls, or falls, elsewhere in the world. The challenge for policy-makers in the U.S. is to inoculate the U.S. economy from the ills that plague the global economy. The Fed, thus far, has been quite adept at keeping the U.S. from catching cold, as the rest of the world sneezes.

Fed Fun

In addition, Charles Evans, president of the Chicago Fed, along with his San Francisco counterpart, John Williams, have both made the case this week, that it would be dangerous for the Fed to begin raising rates while domestic inflation remains below target.

The collapse in energy costs, further declines in other commodity prices, and a distinct lack of wage inflation, almost guarantees that it could take years, as Evans claimed earlier this week, and reiterated on CNBC Friday morning, for inflation to rise enough to warrant higher rates.

I am banking on the Fed to keep the U.S. relatively free from recession and deflation risk, even as the rest of the world threatens to drag us into a downward growth/price spiral.

It may be too late for Europe to avoid such an outcome, or China to grow at its targeted rate. But the Fed is the only central bank on the world that is willing to look at all variables, including those outside our borders, to ensure that policy mistakes of the past, and present, don't emerge to haunt us in the future.

Posted-In: Bank of Japan European Central Bank People's Bank Of China Quantitative EasingOpinion Economics Federal Reserve Best of Benzinga


Related Articles (FED)

View Comments and Join the Discussion!

Partner Center