Wikinvest Wire

Zero Interest Rate Policy officially arrives

Tuesday, December 16, 2008

The Federal Reserve slashed their target short-term lending rate to a range of 0.0 percent to 0.25 percent and signaled the beginning of an era of "quantitative easing" where the central bank will buy a wide variety of assets to support the struggling U.S. economy.

Just 15 months into the current rate cutting cycle, Ben Bernanke has outdone his predecessor by a wide margin, now embarking upon what former Fed chairman Alan Greenspan only contemplated briefly back in 2002 - ZIRP, or "Zero Interest Rate Policy".
IMAGE Most analysts predicted a rate cut of only 50 basis points, from 1.0 percent to 0.5 percent, and the announcement of a range instead of a specific target was unexpected as well.

An even more stunning change came in the policy statement which grew by about half in length to include descriptions of the Fed's present and future open market operations now that monetary policy has reached its limit.
IMAGE The purchase of Fannie and Freddie debt, mortgage backed securities, long-term Treasuries, and the extension of credit to households and small businesses are all just the beginning of what is likely in store for 2009.

6 comments:

But What do I Know? said...

Hi Tim--long-time reader but this is my first post. What I don't understand is this--once one major currency goes to a ZIRP, what does it matter that another one does as well? The big boys could borrow at 0% already in Japan, so how does this make anyone want to get more leveraged and thereby create more money?

Love your blog and keep up the hard work!!!

Anonymous said...

So when do we go to a new currency?

Anonymous said...

When does the US default on its debt so we sustain the inflated GDP numbers of the past 8 years?

Anthony J. Alfidi said...

This also marks the beginning of America's own decade-long stagnation. We have become Japan, without the cherry blossoms.

Tim said...

Let me see if I can answer some of these...
BWDIK - I don't think it does matter - the whole world will be ZIRP before we know it.
Anon 2:30 - 2011
Anon 2:58 - 2010

JKA on Economics UK said...

Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantative easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system.

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