The Federal Reserve decision to reinvest principal payments on mortgage holdings into long-term Treasury securities has many worried about deflation and disinflation. Deflation occurs when there is a general decrease in the price level of goods and services. Deflation is a negative inflation rate which can increase the real value of money. This allows consumers to purchase more with the same amount of money. Disinflation is a wholly different phenomenon where the inflation rate itself changes and occurs when the inflation rate declines.
Deflation and disinflation are both relative to the currency in question therefore inflation rates are also effected by currency exchange. How can the Fed help reduce expectations that interest rates may be too low currently?
The Federal Reserve buy back program helps to quell some fears that they may not be behind the curve but some investors and market watchers are looking for longer term solutions which may not be viable at the moment. Short to medium term concerns over the economy may be more important to those looking for direction on which way markets and the economy are heading. Acknowledgment of the long-term goals does help steer the ship in a direction that keeps deflation and disinflation front of mind. The discussion of the longer term effects of zero interest rates in future is worth having now.
[...] now, but this could also lead to economic instability in the future. Hoenig is concerned about deflation and the risks of expectations for future low interest rates. Could this create boom and bust cycles [...]