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Tim Duy

The Fed Will Soon Need to Stem Deflation

It won’t be long before the central bank begins to acknowledge the fallout from declining wage rates and salaries on the economy.

The Fed may soon have a new battle on its hands. 

The Fed may soon have a new battle on its hands. 

Photographer: Chip Somodevilla/Getty Images

Federal Reserve Vice Chair Richard Clarida expressed confidence earlier this month that the U.S. could avoid an outbreak of deflation. I have become increasingly less confident that we can avoid such an outcome as rising anecdotal evidence of wage cuts reveals the magnitude of the negative demand shock that has slammed through the U.S. economy.

It was common early in the crisis to view the viral outbreak as a supply shock because, from the U.S. perspective, it appeared to be largely impacting the flow of goods from China. This original view suggested an inflationary impact from the virus.