"This gets to be a gamesmanship situation," says economist A. Gary Schilling. "On the surface, the Fed is reacting to the threat of deflation and a weak economy. Does it have deflationary implications? I think it does because it says the Fed is concerned. They're obviously preparing more and more for it. People say, 'Maybe I ought to prepare for it?'"
With both Wall Street and Washington looking to the central bank to do something else to revive what many see as a flagging growth, the Fed's monetary policy committee Tuesday said it would "help support the economic recovery in the context of price stability" by buying longer-term Treasury securities, while downplaying inflation.
"The Fed didn't use the D word in its statement but that's certainly implicit in its thinking," says Scott Anderson, senior economist at Wells Fargo.
After the statement's release, stock prices cut losses and more importantly Treasury prices rallied further. But investors woke up Wednesday and essentially asked, "What just happened?"
In a double-take Wednesday morning, almost every asset class, from gold to oil to stocks, fell ... except Treasurys—the prime beneficiary of the Fed's move—whose monster is inflation.
Few economists see actual deflation in the wings. But given the the economy's slow growth, marked by weak demand, and a spate of recent reports showing falling prices for goods and services, they say deflationary expectations are real and growing.
Economists admit that though the price of many durable goods has been falling, if you take food, housing and oil out of the consumer price index, prices are decidedly higher. What's more, wages—a key ingredient in the deflationary equation—are not falling.
"It isn't deflation per se that bothers the Fed, it's deflationary expectations," explains Schilling.
Economists say Fed boss Ben Bernanke and the FOMC memmbers may have wanted to seem assertive and reassuring in its policy initiative, but at this point the move appears to have backfired.
"It's almost as if their statement now is contributing to deflationary expectations," says Chris Rupkey, chief economist at Bank of Tokyo-Mitsubishi, who otherwise does not subscribe to the deflation argument.
Economists and money managers say the Fed clearly intends to push intermediate and long term rates lower, much as it has with short term rates, to encourage demand and risk, whether it's lending and borrowing or production and consumption, all of which supports price appreciation, not depreciation.