WASHINGTON, D.C.—The Federal Reserve is expected to cut the federal funds rate by one-half point in order to help prevent the current recession from worsening. This comes in the wake of a record drop in consumer prices during November, when prices fell by a record 1.7%—the most-severe drop on record, going back to Feb. 1947.
Although falling prices may, on the surface, seem like a positive move to consumers, it is the sign of a dangerous downward spiral. During deflationary periods, companies that are earning less compensate by slowing production and cutting jobs. This, in turn, causes consumers to further scale back spending. This pattern then feeds on itself and self-perpetuates.
