Fed study puts ideal US interest rate at minus 5%

I'm not sure what to make of this. But a negative interest rate?

www.ft.com...

Fed study puts ideal US interest rate at -5%
By Krishna Guha in Washington
Published: April 27 2009 03:06 | Last updated: April 27 2009 03:06

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

The assessment that the US central bank needs to provide stimulus equivalent to a substantially negative interest rate is unlikely to have changed ahead of this week’s policy meeting.
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Strange implications indeed. Quite a message none the less, that the Fed believes it will need to encourage people to take loans by giving away money essentially....

i think it means that the rate of inflation should reflect 5%.

basically with no interest. the average rate of return should be -5% a year.

and that is the average inflation rate since the fed rate is zero.

Still a little weird and not too uplifting when you look at it that way though.

Basically shows that you lose 5% of all the US money you possess.

reply to post by ghostlandseller


Doesn't mean anything like that at all.. it means that money is so locked up right now and the economy is so contracted that the rate of deflation far exceeds that of inflation.

Meaning we are not out of the Deflationary Spiral.

In other words: Fed needs to increase the money supply.

In other words: Fed needs to increase the money supply.

Again? The banks are holding the money... print 2 trillions and give it to people. That would give 6.600$ per person to spend or to pay debts.

Increasing the US debt to what... 16.2 trillions by october 09?... or 120% of GDP... just under Jamaica...

[edit on 28-4-2009 by Vitchilo]

reply to post by Rockpuck

In other words: Fed needs to increase the money supply.

Man, that can't possibly be good. How many trillions need to be printed out of thin air? Won't the consequences of that be pretty severe in their own right? I guess that will be a problem that will be left for someone else.

I agree friend.. however..

You have to look at it from this perspective:

Money is literally vanishing.. even faster then being created.. be on the personal level, where debt still out stripes capital, or on the corporate level where debt is ballooning, capital is drying up and profits are cascading.

In fact the amount of money literally pumped into the economy does not even match the total wealth lost on the S&P500.

So we have this black hole, this spiral of deflation eating away at the money supply, total money supply.. cash and capital is being created at epic proportions, but it's not being filtered fast enough into the economy.

So the solution won't be more "bail outs" .. imo, it might be more "stimulus" packages... something to get money circulating.

Either way, it shows the fight against deflation is being lost by the fed.

My interpretation anyways.