Boston Fed Reserve President Eric Rosengren warned a week ago in a speech at Washington & Lee University that the Fed target of 2 percent inflation may be hard to reach, considering current economic conditions and the potential for future unexpected world economic situations. He cautioned against the threat of deflation, which would stultify the economy as people put off purchases under the expectation that prices would continue to decrease.

Plunging gas prices in recent weeks have freed up household money for millions, though they can’t exactly postpone buying fuel. But the energy sector is feeling the pinch.  

Forty years ago, the gas-price tables were reversed. In 1973, restrictions on oil supplies by OPEC nations raised gas prices by 66 percent within two weeks. In 1978, another oil price shock led to the drastic counter-inflationary move by the Fed to drive interest rates through the roof, including mortgage interest rates. New homeowners could forget about building equity any time soon. Manufacturers, in pre-Internet America, couldn’t reprint their price lists fast enough. And after five years of economic difficulty, many consumers were unable to make take advantage of prevailing interest rates on savings.

So here we are again. Rosengren’s caution is that the Fed should keep its accommodation policies intact until inflation – at 1.4 percent in September – rises to 2 percent and maximum sustainable employment is achieved. That latter is a moving target despite recent positive movement in the unemployment rate, because it only counts those who are actively seeking work. And for those employed, wages are still stagnant. Savers aren’t being rewarded, and are seeking better returns in the stock market – or real estate. Ads for home equity loans are resurgent, and those who invested in commercial real estate during the recession are looking to cash out as prices rise.

At the end of last month, the Federal Open Market Committee ended the Fed’s bond-buying program and forecast that short-term interest rates would remain near zero. Markets expect short-term rates to rise in the middle of next year, but low inflation continues to be a deterrent, and earlier Fed predictions that prices would rise have not come to pass.

We’re in what is, in essence, an equal and opposite reaction to the economic situation of 1981, when inflation hit 13.5 percent. The Fed raised interest rates to smother the fire; the prime peaked at 21.5 percent, but inflation was knocked down to 3.2 percent in 1983. It was bitter medicine, but it worked, and it worked fast, by economic standards.

Back then, companies struggled to stay afloat until the crisis abated. Today, many are hoarding cash, unless they have a strategic necessity to deploy it. Instead of borrowing now and paying back later with cheaper dollars, companies are shying away from borrowing, because if deflation happens, they’ll be paying back with more expensive dollars. Instead of putting out an economic fire, today the Fed is struggling to move an economic rock.