For those focused on the

inflation vs. deflation debate, the good news is

Federal Reserve

officials aren't terribly concerned about the deflationary threat. That's also the bad news, say those worried about a vicious downward spiral characterized by lower prices.

Those who see a looming deflationary problem believe the key is early intervention. But they don't see policymakers acknowledging the problem.

In a

speech at Carnegie Mellon University in Pittsburgh on Tuesday, Fed vice chairman Roger Ferguson said "the risks of a general deflation are remote."

Although prices for some goods have been declining, Ferguson observed overall price inflation is running at an annual rate of about 1.5% for the GDP and core personal consumption price indices, as well as just over 2% for the core consumer price index. Some in the deflation camp observe those levels are down considerably from recent levels, but less inflation does not necessarily equate to deflation, although it could be a precursor.

In that light, Ferguson conceded complacency about deflation is "inappropriate" but stressed the Fed would take "timely and decisive action" to combat such a development, as "the economics literature advises." In fact, the Fed's second-in-command argued the historic rate cuts in 2001 were an example of the central bank doing just that. Furthermore, he argued monetary policy has been quite effective in the past year, notwithstanding the "moderate pace" of economic growth.

"To judge the effectiveness of monetary policy, one must consider what the economy would have looked like in the absence of easing," Ferguson suggested, countering those who argue the Fed has become impotent. "In this light, given the severity of the shocks that have hit the economy, a better interpretation may well be that recent events validate once again the potency of monetary policy. In my judgment, monetary policy has, in fact, countered some of the negative forces weighing on the economy."

Looking forward, the vice chairman laid out the following reasons why deflation is unlikely to emerge.

U.S. policymakers have learned the lessons of history, both here in the 1930s and Japan's more recent experience;

U.S. banks are "well capitalized" and don't face the severe level of nonperforming loans as do their Japanese counterparts;

The "underlying structure" of the U.S. economy is fundamentally sound, he said, noting inventories have been substantially reduced (save in communications equipment and aircraft) while corporate profits rose in the third quarter and capital spending "appears to have bottomed out."

Long-term prospects for the U.S. economy "continue to look favorable," given the recent trends in productivity growth. Last week, the Labor Department reported business productivity rose 5.3% in the past four quarters, its best showing since 1983.

Of course, rather than having their fears ameliorated, those who do worry about deflation saw Ferguson's comments as another sign of the Fed's ignorance of the threat. (Meanwhile, for those who think the Fed is deaf and dumb to deflationary pressures, take the European Central Bank -- please.) President Wim Duisenberg acknowledged Tuesday "it is difficult to define precisely the timing of the economic upswing in the euro area and also globally" but also gave little indication the ECB will ease anytime soon.)

Blind Men and the Elephant in the Room

"The problem is that the Fed is still pursuing a restrictive policy," said David Hunter, chief market strategist at Kelly & Christensen, who argued the Fed's policy moves have continuously proven to be too little and too late. "It is not the fact that inflation is the lowest in decades that causes me to forecast deflation in 2003, it is the Fed's lack of understanding of the immediacy and magnitude of the deflation risk."

So great is the risk -- and the Fed's blindness to it -- that Hunter expects 2003 will be the "worst economic year this country has experienced" since the 1930s. Rather than preventing deflation's onset, the myriad structural differences between the U.S. and Japan will result in a "much swifter and steeper" descent into deflation here vs. the gradual creep there, he suggested.

Not surprisingly, Hunter took exception to Ferguson's argument that because the so-called real fed funds rate (the fed funds rate adjusted for inflation) is now negative, it is thus "providing considerable support to the interest-sensitive sectors of the economy."

If the real fed funds rate were adjusted for

future

inflation, which Hunter believes will be much lower, then it would not be below zero, he said.

Similarly, the strategist believes money supply growth -- at nearly 9% on a year-over-year basis and 6.3% on a 13-week annualized basis for MZM, according to Hays Advisory Group -- is "clearly inadequate, especially given the immediacy of the risks."

The U.S. is "on a collision course with deflation ... because there is not enough liquidity to keep the economy from drowning in all its debt," he continued. And given the onerous debt burdens of corporations and individuals, "deflation here is more likely to be accompanied by a tremendous increase in bankruptcies, a dramatic rise in unemployment, a banking crisis, a significant slump in housing and much lower lows in the stock market."

Hunter arguably represents the extreme branch of the deflationary party, a group that also includes folks such as Stephen Roach, chief economist and director of global economic analysis at Morgan Stanley.

Roach, Wall Street's leading proponent of both the double-dip recession scenario and of the corresponding threat of deflation, recently opined that the world economy is at a "critical juncture" and possibly its most "perilous point in 70 years."

The confluence of globalization and post-bubble aftershocks is a "highly deflationary combination," he wrote. "To the extent that global policymakers fail to treat these risks seriously, an already treacherous slope can only get slipperier."

Roach did not return phone calls Tuesday seeking comment on Ferguson's speech.

Richard Berner, Morgan's chief U.S. economist, often plays the ying to Roach's yang. On Monday, he, too, examined the deflation debate, suggesting the deflation threat is cyclical, not structural, which is a "critical distinction." In a worst-case scenario, broad-based U.S. inflation measures might temporarily dip into negative territory, Berner wrote, expressing confidence that "the U.S. can avoid structural deflation because we can and will shift resources from glutted sectors to those where returns are higher."

Furthermore, he argued that "with monetary policy now oriented at preventing deflation" (see above), pricing power will begin to return to corporations in the next 12 months.

The Great Debate: Other Voices

Those paying close attention will notice that the debate among policymakers and economists expressed here is overwhelmingly focused on the severity, or lack thereof, of the deflationary threat. Almost no one at the Fed or on Wall Street is terribly concerned about the potential for inflation's re-emergence. That alone should give investors pause, more so when it's combined with recent developments with the dollar, various commodities and the Treasury yield curve, as well as the Republican sweep in last week's midterm elections and the Fed's self-described accommodative policies.

This column will examine that side of the debate in the coming days.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.