Federal Reserve Sets Target Fed Funds Rate at 0 to 25 basis Points

There is no lower to go as the Fed exhausts all of its tools. Japan in the 1990s is the only precedent.

The Federal Open Market Committee decided today to establish a target range for the Federal Funds rate of 0 to 1/4 percent.

According to the Fed, "since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."

Meanwhile, accoring to the Fed, "inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters."

The Federal Reserve furthered that it "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

Finally, the Fed spoke of other measures that it can take, inducating, "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters, the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities and as conditions warrant."

In my view, the Fed no longer has any power to lower rates to stimulate economic activity.  It is exhausting its other options - through open market operations - very quiickly.  The only precedent here is, in fact, Japan in the 1990s.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • ktexas

    December 17, 2008

    As a saver, I found this excerpt from the Fed policy statement worrisome:

    the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

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