0% Interest Rates and New Monetary Policy

In the fourth quarter of 2009 the Federal Reserve’s short term interest rates were 2.0%. Then in the month of October there were 2 separate ½ of 1% (one percentage) rate cuts.

In mid December the Federal Reserve cut interest rates to a record low of zero percent (0%) to .25 percent. These are the lowest rates since 1954 and the Federal Reserve stated that it would keep interest rates at these low levels for some time to come.

The Fed said: “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

Reducing interest rates to 0% marks the end of conventional monetary policy because the Fed cannot reduce interest rates beyond 0%. So it has essentially no further to go to jump start the economy.

In addition to conventional monetary policy the Fed is also employing unconventional measures. The new Fed leader Ben Bernacke is using new monetary “quantitative easing” measures to increase the money supply to ease deflation and deflationary expectations.

Some of these “extraordinary measures” include:

1. expand large purchases of debt issued by government-sponsored mortgage agencies to support the US housing market crisis.
2. the central bank is considering buying long-term Treasury securities to lower borrowing costs by going around commercial banks.
3. the Fed’s balance sheet has expanded from $900 billion to $2.2 trillion since September to increase the money  supply.

Please note the reduction of interest rates to zero (0%) refers to the Federal Reserve base rates and not bank rates or savings rates. Bank lending and savings interest rates are likely to remain above 0% in order to continue to encourage investors to save.

If the inflation rate continues to rise at about 2% a year then 0% bank interest rates will be bad for savers. If we have deflation then this will be helpful to savers. But deflation will hurt the economy as a whole. This is why these extraordinary monetary measures of increasing the money supply are aimed at easing deflation.

It is possible to borrow at 0% with an introductory credit card offer which may last up to 15 months. The zero percent interest rates (0% APR) can be for both balance transfers and for ongoing new purchases or just for one or the other. In some cases it will be possible to get a 0% interest rate credit card for 12 months on balance transfers and 6 months on new purchases. The complete information is found in the terms and conditions section of the credit card offer.