Money for nothing: a new era of zero interest rates?

Mutant — Wed, 12 Nov 2008 03:27:18 -0800

The Fed cut 100 bps. BOE cut 150 bps. ECB cut 50 bps. India, Vietnam, The Czech Republic, Switzerland, Denmark, South Korea and other nations have all cut interest rates in recent weeks, with many Central Banks cutting more than once. The G20 is now discussing the possibility of further, coordinated interest rate cuts. As interest rates globally plummet, we are observing what some analysts are calling "The Race to Zero". Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long anticipated great unwinding continues Central Bankers seem to be hoping that low interest rates will force consumption, pushing economies forward at the same time monetary policy pulls. Given this backdrop, a natural question would be how low can interest rates go? The answer may lie in an unpublished Federal Reserve research paper, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero.” (Clouse, J., et al, 2000) [.pdf] Bonus street cred: Two of the authors are architects of some of the unconventional mechanisms currently deployed by The Fed to fight this crisis (Clouse, J., Small, D., 2004) [.pdf]. No time for lengthy pdfs, no problem! The New York Fed published a single page, very accessible summary [.pdf] of unconventional tools currently in use. Full citation of research papers cited: Clouse, J., Henderson, D., Orphanides, A., Small, D., Tinsley, P., 2000, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero”, unpublished, Federal Reserve Board, Finance and Economics Discussion Series, 2000-51 FEDS Papers, Board of Governors of the Federal Reserve System Clouse, J., Small, D., 2004, "The Scope of Monetary Policy Actions Authorised Under The Federal Reserve Act", Federal Reserve Board, Finance and Economics Discussion Series, 2004 FEDS Papers, Board of Governors of the Federal Reserve System

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Money for nothing: a new era of zero interest rates?