Greenspan Hints at Cutting Borrowing Costs

Federal Reserve Board Chairman Alan Greenspan suggested over the weekend that the next battle for U.S. central bankers may be to combat the effects of falling prices--a signal that the Fed’s next move could be to cut borrowing costs. “Inflation has become so low that policymakers need to consider at what point effective price stability has been reached,” Greenspan said in a speech to the American Economic Assn. on Saturday. “Indeed, some observers have begun to question whether deflation is now a possibility and to assess the potential difficulties such a development might pose for the economy.” Greenspan didn’t say whether he agrees with analysts who say deflation is coming, and he refrained as usual from any direct mention of the Fed’s interest-rate policy. Instead, he noted that deflation in the prices of goods and services--which he defined as a monetary phenomenon triggered by “a flight from goods to money”--can be as bad for the economy as inflation. That is particularly the case when price deflation comes while real estate, stocks and other assets are falling, he said.