Will The Fed Finally Move Interest Rates Below Zero

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Over the last year, there has been speculation that the Fed would drop interest rates below zero, paying its borrowers to take money. Analysts believe that credit is so tight that even with interest rates at zero, the gridlock will not clear up.

Perhaps one of the reasons that the Fed has avoided making this move is that it is unprecedented and would add to the costs being taken on by the government to end the recession.

But, there are people inside the Fed making a case for dropping rates below where they are now.

According to the FT, “The ideal interest rate for the US economy in current conditions would be minus 5 percent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.”  The major factors taken into account in the analysis are unemployment and inflation.

Since there is no clear indication that the Fed’s current policies have done much if anything to spur the economy, the central bank may find itself cutting rates again next month, especially if the GDP numbers for the first quarter are much worse than expected and unemployment continues to move higher. The Fed and the Treasury have said that they will do what is necessary to pull the US out of its current financial and economic crisis. Keeping rates where they are means that the Fed is allowing current policy to keep it from fulfilling that promise.

The numbers for the American economy could actually deteriorate over the next several months, although government officials are saying otherwise. Job losses and housing price troubles are getting worse. Businesses and consumers still have little or no access to credit.

And, the Fed has not pulled out all of the stops.

Douglas A. McIntyre

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