Officials from the Federal Reserve and the European Central Bank say that they are ready to do whatever it takes to control deflation. Deflation is a reduction in the money supply. The effects include lower prices, leading to unemployment cuasing a further reduction in the money supply.

From Reuters…

Both Janet Yellen, president of the San Francisco Federal Reserve Bank, and Lucas Papademos, vice president of the ECB, highlighted the risks of deflation at the annual meeting of the American Economics Association.

“It is increasingly likely that inflation will fall to undesirably low levels,” Yellen said at the meeting in San Francisco.

She said the Fed would likely expand its raft of unconventional monetary policy measures now that its cycle of interest rate cuts has hit rock-bottom.