Zero option

The fed rate cut is good news masking bad, desperate underlying news.

By Thomas Schaller
December 17, 2008 8:06PM (UTC)
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The markets had a good day yesterday on news that the Federal Reserve will cut the federal fund rate even lower than Wall Street was expecting it to.

But the rate is basically zero now. That means there's no room to move it any lower. The Fed toolbox, or at least its primary toolbox, is now effectively empty.


So now the Fed must turn to alternative means to pump capital into the economy. As the Washington Post reports today:

The central bank cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, the lowest rate on record. Although the Fed has no more room to reduce the interest rate -- it has been cut 10 times in 15 months -- the bank's leaders said in a statement that they would use "all available tools" to bolster the economy.

Fed policymakers, noting that financial markets remain strained and economic activity weak, strongly suggested it would use unconventional means to lower the rates Americans pay for mortgages, car loans and business loans.

"The Fed is now focused on getting credit to businesses and consumers rather than just pumping money into the economy in a passive way," said Julia Coronado, senior U.S. economist at Barclays Capital.

I'm not an economist, but Hale Stewart is, and he has some useful analysis (including fancy graphs!) over at HuffPo, where he stated his view very succinctly:

This [Fed rate cut] brings two points to mind:

1.) The Fed has no interest rate moves left. This is it.

2.) The Fed is terrified about the economy.

For those neat graphs and more, read Stewart's comments here.

Thomas Schaller

Thomas F. Schaller is professor of political science at the University of Maryland, Baltimore County and the author of "Whistling Past Dixie: How Democrats Can Win Without the South." Follow him @schaller67.

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