(CEP News)

• Deflation a Possibility, Says Fed's Bullard

• Bernanke Reiterates Recovery Dependent on Financial Stability

• Canadian Retail Sales Improve in January

Fed's Bullard Says Deflation is Real Possibility

Deflation is a real possibility in the current environment, said St. Louis Fed President James Bullard while speaking at an event hosted by the French Central Bank in Paris on Friday.

Bullard said that if people begin to anticipate negative inflation due to a longer-than-expected global recession, the phenomenon could spark a downward spiral in prices, resulting in a deflationary environment.

In January, the Federal Reserve projected GDP in the United States will decline between 0.5% and 1.3% in 2009 and grow between 2.5% to 3.3% in 2010.

Fed's Bernanke Says Recovery Dependent on Financial Stability

The U.S. needs to develop a mechanism to unwind systemically vital institutions, Federal Reserve Chairman Ben Bernanke said on Friday, but added that until the financial system is repaired, an economic recovery will be difficult to achieve.

Speaking at a convention in Phoenix, Bernanke said did say that recent actions taken by the Federal Reserve should help lower consumer interest rates such as mortgages.

The Fed chairman also said 'too-big-to-fail' companies are complacent about risk, calling too-big-to-fail an extremely serious risk that officials need to act on immediately. Bernanke also said regulators should monitor executive compensation.

Canadian Retail Sales See Partial Recovery in January

Following their sharpest decline in more than 15 years in December, Canadian retail sales were back on the rise in January, Statistics Canada reported. January retail sales excluding autos rose 1.3% compared to the previous month, StatsCan said. Economists had been expecting a 0.5% rise, following the 3.1% decline in December, which was revised up from -3.2%.

Headline retail sales including autos rose 1.9% in the month to C$33.7 billion, against expectations for a 1.0% rise and following the 5.2% contraction in the previous month, which was initially reported as a 5.4% decline. January's rise is the largest monthly gain in more than 15 years.

Automotive sales saw the largest increase, with sales up 3.8% in the month, though only partially reversing the 11.8% plunge in December. Sales at gas stations were up 2.6% following a 9.9% fall in the previous month.

Canadian New Vehicle Sales Rebound in January

Sales of new cars in Canada rebounded by 5.5% in January compared to December, with 109,831 vehicles sold by dealers. The rise in sales was slightly less than the expectations of economists.

Preliminary data, however, suggests the number of new motor vehicles sold fell by about 2% in February. Meanwhile, December's 14.8% decline was revised down to a 10.8% contraction.

ECB to Use Manoeuvring Room on Rates, Says Weber

ECB Governing Council member Axel Weber said in Berlin on Friday that the European Central Bank has manoeuvring room regarding interest rates, which we will use. This suggests that the current level of 1.50% is not the lowest the ECB is willing to bring its key policy rate.

Weber also said the central bank could offer longer term refinancing loans, and that expansive policies must be taken back after the crisis.

Fed's Duke Says Mortgage Regulation About to be Overhauled

The Federal Reserve is working to change underwriting rules to prevent the deceitful actions that caused the U.S. subprime mortgage crisis, Federal Reserve Governor Elizabeth Duke said Friday.

Duke said that from July 1, 2007 to June 30, 2008, banks in the United States filed 62,084 Suspicious Activity Reports (SARs), suspecting mortgage fraud. She said the Federal Reserve is already involved in several investigations involving suspected insiders at banks in both commercial and residential mortgage-related fraud.

By Stephen Huebl, shuebl@economicnews.ca, with contributions from Megan Ainscow, mainscow@economicnews.ca, Erik Kevin Franco, efranco@economicnews.ca and Todd Wailoo, twailoo@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca