Tags: yellen | zero | fed | rate

Yellen: Zero Fed Funds Rate Possible

By    |   Friday, 31 Oct 2008 09:53 AM

Federal Reserve Bank of San Francisco President Janet Yellen has joined the chorus of financial experts who believe the Fed’s next move will be to cut the benchmark interest rate to near zero.

“We would do it because we are concerned about weakness in the economy,” Yellen, a non-voting member of the Fed, said in response to a question after a speech, reported Bloomberg News.

“I think we could, potentially, go a little bit lower than,” 1 percent, she said in Berkeley, California.

Yellen described the economy as being stuck in an “adverse feedback loop,'' where tight credit is weakening an already slowing economy.

“Clearly, we have a long way to go before the credit crunch shows significant healing,” Yellen said.

Former IMF Chief Economist Ken Rogoff and former Fed governor Lyle Gramley made similar statements following the Fed’s decision Wednesday to slash interest rates 50 basis points to 1 percent.

The Bank of Japan (BOJ) went to zero interest rates from 2001 to 2006 in its long battle to stave off constantly falling consumer prices, known as deflation, as fearful Japanese hiked savings and refused to spend.

A zero rate in the United States would be in line with Fed Chairman Ben Bernanke’s longtime public pledge to toss money from a helicopter if necessary to avoid a serious financial crisis. And that may be his final aim.

"While the BOJ's zero-rate policy did not work as expected in terms of reviving the economy, it contributed to preventing the financial system from collapsing," Masaaki Kanno, chief economist at JPMorgan Securities in Tokyo, tells Time.

A zero interest rate conjures up the kind of deals automakers made in recent years to drive up sales, but it doesn’t mean free money. Only banks will get that rate, and the problems of credit availability could well continue.

Mortgage rates, for instance, jumped nearly a half-point to 6.46 percent last week. Low rates, meanwhile, will hammer savers and retirees, even if inflation is tamped down. Five-year CD rates now are just over 3 percent, on average.

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Federal Reserve Bank of San Francisco President Janet Yellen has joined the chorus of financial experts who believe the Fed’s next move will be to cut the benchmark interest rate to near zero.“We would do it because we are concerned about weakness in the economy,” Yellen, a...
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Friday, 31 Oct 2008 09:53 AM
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