0% Money
November 23, 2008 by Brian Kinkade
Filed under Business & Finance
The Fed meets December 15th & 16th.
A growing number of analysts now predict that the economy is so weak that the Fed will have to reduce its official target to zero if it wants to jump start the stalled economy, as it said in its last policy statement.
Japan’s central bank reduced its benchmark interest rate to zero for five years, from 2001 to 2006, primarily to combat a persistent case of deflation (a broad-based decline in consumer prices) and to revive economic growth. The jury’s still out on the move’s success.
Some analysts here see signs that the United States faces a similar threat. American banks have become so decimated by losses in real estate that they are either unable or unwilling to resume normal lending practices. And as prices for oil and many other commodities have crashed during the past two weeks, these same analysts now warn that deflation might be a threat here as well.
If the Fed funds rate does drop to zero, it would not mean free money for consumers or businesses. The zero rate would only apply to the reserves that banks are required to maintain and that they lend to one another. Customers would still have to pay some interest, but the rates could be extremely low for some business borrowers.
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