The Federal Reserve and the Beige Book

Alan Greenspan and his colleagues at the Federal Reserve have spent their professional lives fighting inflation and trying to maintain the economy. But in the fall of 1999, central bank officials gathered in Woodstock, Vt., to talk about the opposite: What would they do if faced with deflation, or widespread falling prices, and they already had cut interest rates to zero? At Woodstock, researchers brainstormed about possible ways the Fed could spur spending, such as adding a magnetic strip to dollar bills that would cause their value to drop the longer they stayed in one's wallet. At the time the chance of deflation in the U.S seemed remote. Inflation was low, but the economy was booming and the Fed had lifted short-term interest rates above 5%. Today, deflation no longer seems so remote. Fed officials and most private economists still think deflation is highly unlikely. While the Fed is expected to cut rates, that's more out of concern about slow growth, not deflation. Most Fed officials feel that the points of rate-cutting room they have left are plenty to get the economy growing briskly again.…