Friday, September 11, 2009

San Francisco Fed: Federal Reserve Would Like to Cut Interest rates by Another 2%!

From the San Fanciso Fed itself, paper presented yesterday:

"In a paper to be presented Thursday afternoon at the Brookings Institution in Washington, John Williams, a top staff economist at the Federal Reserve Bank of San Francisco, extracts some lessons from the way the global crisis has forced central bankers to bring interest rates down near zero – effectively exhausting their main tool to support the economy. He estimates that if it could, the Federal Reserve would want to cut rates an added two to four percentage points to bring the unemployment rate down more quickly."

John Williams also says that an inflation target of 2% "is fine as long as one of two conditions holds: (1) The economy of the future is no more volatile than that of the last 40 years, and the inflation-adjusted interest rate needed to keep the economy running at full capacity is no lower than 2%, or (2) a combination of fiscal stimulus and unconventional monetary policy, such as the billions of dollars the Federal Reserve is pumping into bond markets, is implemented when needed — and has some impact."

"... if those conditions don’t hold, policy makers might want to consider an inflation target as high as 4%, well above what any of the current Fed governors have suggested they would consider prudent. [...] if the Great Moderation is a thing of the past, the equilibrium interest rate remains very low, and appropriate alternative monetary and fiscal policy strategies are not implemented, then the higher inflation number is needed to protect the economy.”

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