Bernanke cuts base lending rate to nearly zero

[Bastian Gross]

The low base rate will be a range of zero to 0.25 per cent, announced the Federal Open Market Committee and US-Fed, and is aimed at fighting off both deflation of the currency and a paralyzing global credit conglomerate.
"Since the committee's last meeting, labour 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," the US Federal reserve said after its unanimous decision.

The central bank headed by Ben Bernanke said it would move "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".

 

[doug reich]

Fed Funds Rate Cut Again

The Fed has cut its target rate to 0.25%. http://www.nytimes.com/2008/12/17/business/economy/17fed.html?hp

I'm not economics maven, but why? Aren't we in a crisis of confidence? This is supposed to be an anti-deflationary measure, but we are at risk of deflation because of huge economic slowdown. And the economic slowdown is from the credit crunch: banks can't or won't make loans, and the only driver of growth over the last 5 years (rising home prices) is now reverting, so we have a long way to fall to get the GDP back in line with real earning power. (Not to mention the savings rate is way up, so we will overshoot even that trend line.)

For example, even as treasuries have been going to zero yield, corporates have been going up; that is risk aversion, and the rate of return for those investments means nothing.

I don't claim to know enough to really contradict what's going on here, but I would like to understand it better.

EDIT: Real Time Economics : Economists React: 'Who Could Ask for Anything More?' says a little to my question. Specifically,

In practical terms, the decision to slash the target rate will do almost nothing to boost economic activity. However, it does send a strong message to the markets that the Fed means business, particularly when combined with the commitment to leave rates at near zero for some time. With official interest rates now as close to zero as they are going to get, the Fed’s focus has already switched to quantitative easing. –Paul Ashworth, Capital Economics

At what point do they stop sending messages and actually do something? Or is there nothing more "to do" -- at a certain point papa Bernanke can't actually make me invest my money.

I also like the comments on here: http://blogs.wsj.com/economics/2008/12/16/economists-react-who-could-ask-for-anything-more/ (stupid internet comments, mostly, but people on WSJ have, on average, more than half a rain, so it can be good stuff)

 

[bigbadwolf]

At what point do they stop sending messages and actually do something? Or is there nothing more "to do" -- at a certain point papa Bernanke can't actually make me invest my money.

I'm not going to claim false expertise but I'll explain the bits and pieces I understand. In the ideological framework Bernanke operates in, and which has been in vogue for the last three decades, the only instrument the Fed -- and by implication the US government -- leaves itself is tinkering with interest rates. By contrast, Nixon had a wages and prices policy, and before the current era, administrations have been willing to tinker with taxes as well. The people now in charge want to change the status quo as little as possible -- despite the severity of the crisis. Maybe they can't think outside the box, maybe they don't want to. The idea of an active state regulating overall economic demand is repugnant to them. Somehow the market is supposed to "self-regulate." Bit what if it doesn't?

Obama, as you know, has announced a big public works policy that is nothing if not "Keynesian." Let's see what happens.