Weak recovery challenges Fed

A string of developments, including a weak jobs report on Friday, have altered the sentiment at the central bank, leading policy makers to stop worrying for the moment about the increasingly remote prospect of inflation. Instead, they are more focused on the potential for the economy to slip into a deflationary spiral of declining demand, prices, and wages.

Economists, including former Fed officials, say the central bank’s interest rate policy committee is likely, at the least, to acknowledge a slowdown in the recovery and to discuss steps like reinvesting the proceeds from the Fed’s huge mortgage-bond portfolio, which could help the economy by keeping more money in circulation.

Not since 2003 has the prospect of deflation been taken so seriously at the Fed, and not since the 2008 financial crisis have the markets been looking so closely to it for guidance. With Congress unwilling to embark on new stimulus spending, the Fed has the only tools likely to be employed anytime soon in response to the economic warning signs.

The Fed’s chairman, Ben S. Bernanke, and other officials believe the Fed, having lowered interest rates to zero in 2008, still has the ability to avoid deflation. But they are concerned that any new dose of monetary medicine could carry unintended side effects, making it harder to normalize policy in the future.

Complicating matters, a vocal minority of Fed officials is skeptical that deflation — a spiral of falling wages and prices, which Japan’s economy has experienced since the 1990s — is even a worry.

Alan Greenspan, the Fed’s chairman for 18 years until he retired in 2006, said Friday that the economic outlook has darkened.

“It strikes me as a pause in the recovery, but a pause in this type of recovery feels like a quasi-recession,’’ he said.

Greenspan said there had been “some evidence of a pickup in inflation’’ until the Greek debt crisis took hold in the spring. But the resulting uncertainty drove down long-term interest rates — the yield on the benchmark 10-year Treasury note fell to 2.82 percent Friday, the lowest level since April 2009, and barely budged Monday — in a reflection of what Greenspan called continuing problems in the financial markets.