The Fed's decision to cut the benchmark fed funds rate to between zero and one-quarter of a percent is being met with some mixed reactions around the Web:
The WSJ says: No more messing around.
Recognizing that cutting interest rates to 0.5% or 0.25% is a distinction without a difference, the Fed has decided not to play games with this sort of nonsense anymore and establish, for the first time in history, a zero-interest rate policy, establishing a targeted range of 0% to 0.25% to try to jump-start an economy that has been thrown into reverse in the fourth quarter.
The NYT's Economix blog rounds up reactions from economists including:
“This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here. Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too.” – Paul Krugman, The New York Times.
Forex expert Kathy Lien makes the Japan comparison too:
The Fed has taken another page out of the Bank of Japan’s book and will continue to follow in the footsteps of the Japanese central bank as they formally adopt Quantitative Easing even though they refuse to use those words explicitly.
Felix Salmon worries the Fed doesn't seem too concerned about the downside of a zero-rate policy:
I don't like this -- not unless the Fed really cracks down on fails-to-deliver in the repo market. If rates are at 0% and there aren't any penalties for failing to deliver Treasury bonds, then fails are going to rise even further, and faith in the repo market could evaporate very suddenly, with catastrophic knock-on effects. There could also be nasty unintended consequences for money-market funds.
Brian Bethune at IHS Global Insight sums up a slightly more hopeful outcome:
The Fed's actions today effectively moved the entire treasury yield curve down. This is exactly the kind of forceful medicine the economy needs as it plumbs the depths of the current recession. The Fed's actions will translate into much lower effective borrowing costs in the next few weeks, with the prime rate dropping immediately to 3.25%, and mortgage rates moving down towards the 5.00% range within a few weeks.
Today's Fed actions have been forceful and effective. They are fully congruent with Chairman Ben Bernanke's pronouncement in October that the Fed would not "stand down" until the battle against the current economic and credit crisis is won – indeed, this is exactly the decisive leadership and action that the American public is looking for to pull the economy out of its current tailspin.
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