Think 1% Is Low? He Could Go to Zero

Analysts predict Japan-style cuts in interest rates
By Jason Farago,  Newser Staff
Posted Oct 30, 2008 9:45 AM CDT
A pedestrian walks by an electric market board with an image of Federal Reserve Board Chairman Ben S. Bernanke in central Tokyo on Tuesday, October 21, 2008.   (AP Photo/Katsumi Kasahara)
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(Newser) – Yesterday Ben Bernanke cut the federal funds rate to an ectomorphic 1%—but the Fed might not be done yet. More and more analysts are predicting that the central bank will have to cut rates all the way to zero if it wants to get the economy moving again. But don't get too excited, writes the New York Times: A 0% funds rate would apply only to interbank lending, and wouldn't mean free money for consumers.

In Japan, interest rates remained at zero for 5 years before the central bank cautiously upped them to the current 0.5%. Now economists think America faces a Japanese-style threat of both reduced lending and possible deflation. And if he does cut to zero, Bernanke could go further still; the Fed's next move would be purchasing securities and debt to drive rates down even more.