The impact of the coronavirus on the US economy will not push the country into deflation, given the response of the Federal Reserve and its power to do what is necessary, said Fed Deputy Governor Richard Clarida.

“Demand is very unfavorable. Rather, we have disinflation. I don’t think it’s deflation. I think we have the tools to protect the economy from deflation”, said Richard Clarida.

Distinction is important. The Fed is aiming for a 2% inflation rate, and a period of disinflation, when prices are still rising, but at a slower pace, means moving away from that target. Deflation, on the other hand, refers to a chronic problem where goods and services are actually becoming cheaper and are associated with more severe economic episodes such as the Great Depression. When prices fall, they are usually followed by wages, and then households reduce their costs.

deflation noted that analysts initially viewed the coronavirus as a potential shock to global supply chains because of its impact on Chinese production. Instead, the contagion strikes demand, but Clarida expressed confidence that the Fed has the power to counteract the negative impact.

“I always thought that if we were hit, it would be a shock to the aggregate demand, and that’s exactly the case. We’re trying to make up for this with programs that involve lending to smaller businesses and government”, said Richard Clarida.

The Fed has also cut interest rates to almost zero and all talk of raising them is “very far in the future”, he said.