Thursday, October 30, 2008

Can Fed Rates Go Below 0%?

Fed Signals Door `Open’ for Cutting Rates to Lowest on Record
Thursday, Oct 30, 2008
Federal Reserve Chairman Ben S. Bernanke signaled he’s ready to cut interest rates to the lowest level on record should the central bank’s actions fail to stem the deepening economic slump.
Policy makers said yesterday that “downside risks to growth remain” even after their half-point reduction in the main rate to 1 percent. The Fed dropped a reference in its statement to threats from inflation, projecting “levels consistent with price stability” in coming quarters.
“The door is wide open for further rate cuts or anything else that might help the economy,” said Allen Sinai, chief economist at Decision Economics in New York. “The implication is that we’ll see another half-point cut in December, if the prospects for the economy remain poor.”
Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday’s shift indicates he’s prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.

“There is no doubt that the principal risk today is a downside risk” to growth, said Gramley, who is now a Washington-based senior economic adviser for Stanford Group Co., a wealth-management firm. “Inflation has been taken off the table.”
Global Impact
Reflecting a crisis that has reverberated throughout the global economy, the Fed’s Open Market Committee yesterday said that international rate cuts should contribute by loosening credit markets. The FOMC also said slowing economies abroad will threaten the record boom in American exports, which have kept the U.S. from a deeper slump.
“Both of these references show the global nature of the current situation and the global coordinated response, which is the mindset best suited for today’s crisis and the crises of tomorrow,” Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. LLC in New York, wrote in a note.

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