Ask the Expert: Low Interest Rate Policy
June 24, 2010
Q: Will the U.S. follow a zero interest rate policy like Japan for many years? Countries such as Switzerland, Japan, China, and Singapore have held rates low for a long time, either recently or in the past. Is the U.S. headed in this direction?
A: I think we are already there.
Your question is very relevant, because the Fed has not only kept short rates near zero, but it has taken pains to signal that it will keep rates there for an extended period of time.
Of course, you can question the effectiveness of this approach --not only because of the halting recovery here in the U.S., but because of the Japanese example you cite. The Japanese have seen twenty years of anemic growth despite near-zero interest rates. That's not to say that the low interest rates are the cause of these problems, but as a stimulative measure, they can be an example of what economists call "pushing on a string."
Meanwhile, not only have low interest rates been an ineffective stimulus, but low Fed rates mean low bank rates, and there is a cost to low bank rates. With most CD rates as well as rates on savings and money market accounts running below the rate of inflation, savers have been losing purchasing power. That's money that has been effectively sucked out of the economy -- and that's anti-stimulative.
Someone as renowned as Ben Bernanke is for knowing economic history is undoubtedly aware of the failure of low interest rates to revive the Japanese economy. What is less clear is what he thinks will be different this time around.
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