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More on the Federal Reserve

By J. Michael McBride (all)

As noted yesterday, the Federal reserve has a limited number of tools and yesterday’s allowance of the rate to drop to zero a. was an acknowledgement of something that was already happening and b. made clear that this tool (the ability to adjust interest rates) has not worked to halt the economic slide nor does it have any more use at this point (one cannot go lower than zero). So, it can focus on its other tool, printing money.

“In its statement, the Fed made it clear that it won't be shy about printing money to thaw the frozen credit markets. Essentially, ‘the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself,’ the NYT helpfully explains. In normal times, the Fed can spur spending by lowering its official rate. But this hasn't been working well for months because even though the official rates are low, banks remain fearful about lending money….The WSJ says Fed officials came to their decision after two days of meetings where lots of time was devoted to other steps the central bank could take to fight the recession. Federal Reserve Chairman Ben Bernanke spent much of his academic career studying these questions, "and the Fed is now employing almost every prescription he laid out in the past," notes the WSJ. Of course, the new strategy carries risks. There's no guarantee that it will work, and, as an added bonus, it could create higher inflation. But officials aren't too worried about that now, particularly since the consumer price index plunged 1.7 percent in November, a new record. The dollar fell sharply yesterday for the second straight day, which, as the NYT points out, reflects a fear that there could soon be lots of freshly printed dollars in the markets.

And “Although it may be shocking and historic that the Fed would cut a key interest rate from 1 percent to nearly zero, the truth is that the move is largely symbolic. For weeks, the federal funds rate has been trending far below the 1 percent target.”

Here is a link to this quoted article which summarizes several large daily newspapers:
http://www.slate.com/id/2206949/

Michael

Full post as published by Texas Lawyer Blog on December 17, 2008 (boomark / email).