The Federal Reserve's decision today to lower the fed funds rate to a target range of 0.00-0.25% represents the Fed's last shot they can take at the recession with the fed funds gun. They are literally out of ammo with that instrument. You can't lower the rate below zero. The effective fed funds rate for Wednesday, December 10, was 0.13%. We are now really in uncharted territory. How can I say this any more forcefully? This is like Japan in the 1990s, except every other country in the world is entering a recession as well. The only difference is that the Fed is trying to signal more willingness to do anything and everything than Japan did in the 1990s. We'll see if it will be enough.
The magnitude of the situation is highlighted by the fact that many forecasters have the current U.S. and global recession lasting at least another year. But the Fed has to fight the rest of this battle with weapons that have not been battle tested. I have more confidence in Ben Bernanke than any other person that might have filled the role of Fed Chairman right now. But the risks have never been higher. We are now forced into experimenting and improvising in a time when the stakes are extremely high.
In addition to the monetary tinderbox, we are also experiencing the greatest shift away from a market directed economy to a government-owned and government-run economy since the New Deal. I am not saying that I would have preferred no government intervention in today's global financial crisis. But I am saying experience has shown that this kind of intervention takes decades to undo. We are most certainly at a crossroads in American History.
In addition to the monetary tinderbox, we are also experiencing the greatest shift away from a market directed economy to a government-owned and government-run economy since the New Deal. I am not saying that I would have preferred no government intervention in today's global financial crisis. But I am saying experience has shown that this kind of intervention takes decades to undo. We are most certainly at a crossroads in American History.
A particularly relevant paper from Bernanke- how to conduct monetary policy with near zero nominal rates: http://www.bis.org/review/r021126d.pdf
I wonder what this will do to the effective fed funds rate, which was hovering in this area any way?
Jason