Disinflation or Slow Deflation Trajectory...

In Economics we generally assume that the value of money falls in the long-run because inflation increases as the money-supply is increased, the Monetarism. One of its principal proponents Milton Friedman based his models on the Irving Fisher’s Quantity-Theory-of- Money which states that as the money-supply is increased, either by the monetary and/or the fiscal policy it increases inflation which also forms the core of the inflation-expectations theory because it assumes that when money-supply is increased it also increases inflation -expectations. This is what the Fed in the US is trying to do to come out of the liquidity-trap, since only higher inflation and inflation-expectations make case for rate-hikes and hike-expectations the short and the long-run. Inflation and interest-rate expectation may influence spending decisions.

The Fed could try to moderate long-run interest-rate and interest-rate expectations that the economy can weather rate-hikes in the long-run on its current growth... without decelerating.... A little higher unemployment rate may save the economy from overheating, when the neutral real interest-rate has some positive bias so that the downward pressure on the price-level to make savings worthwhile... Capitalists earn profits, save and invest, they have a low propensity to consume... they demand less compared to income... The value of multiplier would be low... The economy is demand deficient... Since 1970s, real wages have stagnated low even after in increase in the economy’s productivity... Higher real wages would increase domestic demand and income and growth...

In the liquidity-trap, Keynes advocated government intervention during recessions... He probably prescribed counter-cyclical economic-policy to stabilize trade-cycles for full-employment and stable-price, too...

The Fed thinks that neutral real rates could go up... Currently, it is negative with 2% inflation when the nominal rates are close to zero... It is expecting that neutral rate might go up probably because higher nominal rate may lower economic-activity and inflation... Lower prices and higher real rates could increase savings in banks... Money value would increase and more savings would lower loans-rate which means more investment in the future... Lower price or prices expectations are more expansionary, both consumption and savings and investment increase... The Fed might commit a lower price and price-expectations trajectory in the long-run to increase demand when demand from population growth-rate is going down which determines the employment, production and economic-growth...

Lower cost of supply - lower real interest rate and lower real wages – because of lower-prices and lower population growth-rate has made supply outpace demand and also lower the price-level, and lower oil prices have all contributed to low inflation and low inflation expectation... Fundamentally we are in a lower price regime…