The new Fed interest rate: Zero is my hero

The Federal Reserve lowers interest rates to a target range between zero and a quarter point. That, folks, is about as low as you can go.


Andrew Leonard
December 17, 2008 12:45AM (UTC)

The Federal Reserve has finally answered that age-old question: How low can you go? In a statement released early Tuesday afternoon, the Federal Open Market Committee announced it would lower the target for the federal funds interest rate to a "target range ... of 0 to 1/4 percent."

Even the great Alan Greenspan, renowned throughout the land for his willingness to lower interest rates whenever the stock market needed a pick-me-up, never broke below the 1 percent barrier. But then, Greenspan never presided over a committee that had quite this dour an outlook on the state of the economy:

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Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Translated from Fedspeak, that's the equivalent of "Abandon Ship! Every man, woman, and child for themselves!"

The only good news: Inflation is no longer even a whisper of a problem.

The Fed further promised to "employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," and "to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level."

In other words, the Fed will continue to drop cash from helicopters, striving by every and any means possible to juice the economy.

But as Paul Krugman observed just a couple of weeks ago, the Fed has already been "spectacularly aggressive" in its efforts to use monetary policy levers to unstick credit markets and jolt the economy back into life and "it doesn't seem to be working." Tuesday's action is just more of the same.

For the time being, however, Wall Street is pleased: At 2:40 p.m. EST, the Dow was up 235 points.

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UPDATE: As usual, Justin Fox adds buckets of enlightenment with his own sophisticated take on what's going on with the Fed.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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