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The Fed’s free money
Has the Federal Reserve cut interest rates too far?
 

After cutting its key interest rate by half a point, to 1 percent, the Federal Reserve is “surprisingly close” to "free money” territory, said Edmund Andrews in The New York Times. And some economists think the Fed will have to cut its official target to zero to “jumpstart the stalled economy.” It wouldn’t be free money for consumers, just interbank lending, but the move isn’t unprecedented—Japan had its benchmark rate at zero from 2001 to 2006.

“We are Japan” now, said David Callaway in MarketWatch, at least in terms of monetary policy. And that isn’t a good thing—zero rates didn’t work for Japan, and it won’t work for us. People won’t earn anything on their savings accounts or CDs, hurting retirees and other fixed-income consumers. “How’s that for an invitation to go out and spend?”

Actually, the Fed’s rate cut “was neither surprising nor all that meaningful,” said The Wall Street Journal in an editorial, and it didn’t have much choice either way. The Fed needs to use monetary policy to promote price stability, rather than growth, and cutting rates should help counter the real risk of deflation.

Now that it’s slashed rates, it should learn from recent history and raise them slowly, said Michael Mandel in BusinessWeek online. Rate cuts, and hikes, take 12 to 18 months to fully kick in, and the relatively quick jump from 1 percent in 2004 to 5.25 percent in 2006 might have been too much of a shock to Americans “hooked on cheaper credit,” worsening the current crisis.

 

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