Disinflation, with the possibility of deflation, is the key near-term risk for the economy, and under these conditions monetary policy should focus “on quantitative measures, beginning with the monetary base, to get some idea of the thrust of policy with respect to inflation,” according to Federal Reserve Bank of St. Louis president James Bullard.

“The monetary base has expanded at an extraordinarily fast pace during the fall and winter, much of that expansion has been closely related to the Fed’s lender-of-last-resort function, and cannot be counted on to keep expectations of disinflation and deflation at bay,” Bullard said. He added that the Fed needs “a more systematic method of keeping the persistent component of monetary-base growth rates elevated in order to combat the risk of a deflationary trap.”

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