Fed Rate Cut: Future Stop, Zero?

Former Fed folks think more aggressive cuts are on the way.

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Now that the Fed has slashed rates by a half-percentage point, big leaguers are already asking if that's enough to prop up the flagging economy.

Former Federal Reserve governor Laurence Meyer thinks the federal funds rate may drop all the way to zero next year. According to Real Time Economics, he and former Fed economist Brian Sack expect the Fed to cut rates 0.5 percent again, in December.

A Meyer-Sack research note (per Real Time Economics) says:

However, the expected rise in the unemployment rate, paired with the rising threat of deflation, presents a risk that the FOMC will have to ease even further, perhaps all the way to a zero federal funds rate.

They also say:

Plugging our interim forecast into our backward-looking policy rule suggests that the federal funds rate should be cut to zero by the middle of next year.

And:

Our forward-looking policy rule...gives similar results if we plug in our updated forecast, as it calls for a funds rate of about zero by early 2010.

The NYT points out that if rates reach zero, the Fed would just about be out of tricks: "It would have to resort to unconventional tools that it has never used before. Instead of trying to reduce rates on overnight loans between banks, for example, it might start buying longer-term treasury securities to push those rates down."


TAGS:
interest rates
Federal Reserve

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