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Ten years on, Fed's long, weird, trip to zero -defined central bank


PHOTO PHOTO: The Federal Reserve Building is depicted in Washington, DC, USA, August 22, 2018. REUTERS / Chris Wattie / File Photo

Regardless of acronym, when the US central bank dropped its policy rate to close to December 1

6, 2008, in order to counteract a full-scale economic crisis, it initiated what the central bank's chairman at the time Ben Bernanke called "the end of the old regime".

A decade later, the full impact and the import of that movement is still not entirely clear. But Bold was never the same. The decision to move to zero began wholesale changes on how Fed works, from building a massive balance sheet to adopt an explicit 2 percent inflation target and hold regular press meetings after the meeting.

A new survey continues to investigate the likelihood that trips to the "effective lower limit" will become commonplace.


It stands for "zero interest rate policy" and became one of the most common acronyms used to describe the seven-year period when the Fed's benchmark overnight rate was parked in the range between zero and 0.25 percent. Policymakers also called it "zero lower limit" and "effective lower bottom."

Fed was not the first to hire such an aggressive response to an economic downturn. Bank of Japan adopted ZIRP in the 1990s as a result of collapsing on its real estate market that helped trigger a decade of economic stagnation. tmsnr.rs/2QPjcTq

Why adopt ZIRP?

There was no other place to go. From July 2007 to autumn 2008, Fed had trimmed its target interest rate from 5.25 percent to 1 percent.

The economy was so weak that many models indicated that the appropriate Fed rate would have been negative – in fact, a tax on savings that can make people spend. While theoretically possible and actually later adopted by some central banks elsewhere, negative interest rates would have been a political non-starter in the United States Congress and difficult to sell to the public in a rapid crisis.

Instead, a dramatic Fed action drove the key rate to a range between zero and 0.25 percent. In fact, it was a zero rate, but more importantly, Fed showed willingness to go to extremes. tmsnr.rs/2QRlamE


Not barely. And Fed officials knew that the developing crisis needed more than just the standard interest rate policy.

"I see some benefits of gradualism," said San Francisco Fed President Janet Yellen, the final chair, according to the transcript of the December meeting. The statement that announced the cut also said Fed "will use all available tools to promote the resumption of sustainable economic growth".

The flagged thing that would come, including trillion dollars in asset purchases, shore up financial markets and maintain the low long-term interest rates critical to housing and mortgages. Even though Fed could not lower its target further when the "lower limit of the zero" had been reached, the unconventional tools used by Fed still form financial markets today. tmsnrtrsrs / 2SFRJRo


Unemployment is at least in almost 50 years. Inflation is hovering around Fed's goal. A close decade of economic growth will be the longest expansion on record next year.

What do not you think about?

It took seven years for Fed to leave the lower limit of the zero, and prices are still abnormally low. In some accounts, consumers and businesses can depend on cheap money, and as sensitive to interest rates, their willingness to buy housing or invest may fall faster than before, as interest rates rise.

Companies, meanwhile, have gorged on cheap debt, possibly laying the foundations for the next crisis. tmsnr.rs/2SK4s5T


Almost safe.

Fed has raised interest rates now for three years, but does not expect them to take much higher than 3 percent. Target rates of 5 percent or more were common earlier, but few on Fed expect to return to these days.

The assumption is that interest rates globally will remain lower than those politicians routinely lowering interest rates to zero in future recessions. As a consequence, they expect them to keep tools like asset purchases ready and investigate other strategies, such as higher inflation targets, which can lift all prices closer to their previous levels. [nL1N1YH1FY]

ZIRP's era, in other words, may have just begun. tmsnr.rs/2QLv4G1

Reporting by Howard Schneider; Editing Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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