Debate Intensifies at Fed Over Economy

By Jeannine Aversa, AP Economics Writer

WASHINGTON (AP) — Debate is intensifying at the Federal Reserve over how best to cope with a weakening recovery, with momentum growing for a concrete plan to prevent a backslide into recession.

That came into view Thursday as James Bullard, president of the Federal Reserve Bank of St. Louis, offered a specific proposal. He said the Fed should revive a crisis-era program to buy government debt if the country seems headed toward a bout with deflation.

Fed Chairman Ben Bernanke has yet to endorse precise steps, only saying that the Fed is ready to act if needed. He has mentioned possibilities, while committing to none.

And one Fed official has dissented all year over the Fed's pledge to keep interest rates at record lows, pointing to some unease inside the central bank over taking any new steps to stimulate growth.

Bernanke and his colleagues meet next on Aug. 10. Economists don't think the Fed will announce new policy actions at that time, unless the economy were to seriously deteriorate before then. However, what specific elements should be part of a contingency plan are likely to dominate those discussions, analysts said.

Bullard, a voting member this year on the Fed's main policy-setting committee, worries that the United States could tip into a Japanese-like bout of deflation if the economy weakens. Deflation is a widespread and prolonged drop in prices of goods, values of homes and stocks, and in wages.

For now, Bullard thinks the deflation risk is still low. But the danger could grow. Buying government debt would energize the economy and nip deflationary forces.

"It pays to think ahead about things that might happen," Bullard told reporters. "This is a matter of being ready, in case something else hits."

Bernanke told lawmakers on Capitol Hill last week that the Fed policymakers had several options if the economy worsens.

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