Nearly Zero

It was widely expected but it is still quite a shock to see the Fed Funds rate dropped to 0.25%. Today’s move by the Federal Reserve Board had been anticipated by the markets for a few days, and after this morning’s other news about inflation (or deflation) and housing starts it was inevitable that the Fed would maintain its aggressive posture. Here’s the New York Times report: Fed Cuts Benchmark Interest Rate to Near Zero – NYTimes.com

This just about exhausts the Fed’s usual policy options. Now they are going to shift to approaches to stimulate growth that we have not seen before. Asset purchases will be first: the Fed will start buying up bank assets to hold on its own balance sheet. The idea is to keep pumping money into the economy in order to deal with both the liquidity and solvency issues that still pervade the banking system. Sometime, when conditions seem to be improving, banks will start to lend again rather than hoard cash for defensive purposes. Meanwhile the Fed’s balance sheet is set to balloon to more than $3 trillion.

The problem with printing all this money is that when things start moving again all that cash will slopping around the economy will be massively inflationary. Then we will see the Fed try to squeeze the economy dry again. A central banker’s life is never dull!