Fed may cut interest rates even more
The Federal Reserve is widely expected to divide share rates again — and might even cut all the way to zero — to revive the economy. A 0.5 percentage point cut is expected at the central bank’s Dec. 15-16 meeting, which would bring the target to 0.5 percent. That’s the lowest level ever based on Fed records that begin in 1990.
Michael Feroli, a U.S. economist at JPMorgan, says fears of deflation will prompt a cut to zero by the Fed’s Jan. 27-28 meeting. That rate will be held through 2009, he says.
Deflation, a recurring decline in prices, is rare but damaging to the economy and tough to get rid of. Consumers postpone expenditure as they look forward to prices to ear-ring. This stunts economic expansion, forcing companies to cut more jobs, what one. more remote pressures expenditure.
Low rates can stimulate housekeeping expansion. By making capital cheaper for banks, the Fed hopes they’ll lend more, and encourage spending through consumers and businesses. So far low rates haven’t done the trick; credit remains tight amid the financial decisive turn.
Moody’sitting Economy.com economist Ryan Sweet says another Fed divide might not help much from the time of the effective “real nature” traduce is before that time below the target.
The Fed’s many liquidity programs are making the rate hard to control, says IHS Global Insight economist Brian Bethune. “These are not analogical operating conditions,” he says.
If the traduce goes to zero, the Fed loses a key weapon in its armory. Sweet thinks it might first announce plans to keep the rate low for an extended cycle, with the aim of reducing long-term Treasury yields. This could push down rates on mortgages and other loans.
Sweet notes a zero percent federal funds censure would make it difficult for money-market funds to offer competitive yields. As a result, investors could tear currency out of banks — which is not the kind of the Fed wants, Sweet says.
