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U.S. Fed Zero Interest Rate Policy Coming?

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Mike Shedlock
The Market Oracle
Saturday, Nov 1, 2008

The Fed did not want to cut the Fed Funds Rate below 2%. And because Congress recently granted authority for the Fed to pay interest on reserves, Bernanke thought incorrectly that he could keep rates above 2%. So much for that academic theory. Now many are wondering if ZIRP (Zero Interest Rate Policy) is coming to the Fed.

The LA Times addressed the question today in The Fed’s rate at zero? It’s no longer a far-fetched idea.

Just a day after the Federal Reserve dropped its key short-term interest rate to 1% — matching the generational low reached in 2003-04 — the betting is intensifying on another cut.

Trading in futures contracts on the federal funds rate, the Fed’s benchmark, implies a 51.4% probability that the central bank will slash the rate to 0.50% on or before its next meeting on Dec. 16, according to Bloomberg News data.

(Article continues below)

Rate expectations may be cueing off the government’s report today that the economy shrank at an annualized rate of 0.3% in the third quarter. Although analysts figured the economy had contracted in the period, the details were ugly — particularly the 3.1% decline in real consumer spending, the biggest drop since the vicious recession that began in 1980.

The Bank of Japan had to maintain its benchmark interest rate at or near zero for most of the 1999-2006 period, before policymakers finally felt comfortable that the economy was in a sustainable recovery.

This article was posted: Saturday, November 1, 2008 at 5:35 am





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