During the last half of 2008, the Fed seemed to take "baby steps" in reducing the federal-funds rate target, before finally lowering it to zero. Why can't the Fed push the rate any lower than zero? Why do you think that the Fed was so seemingly reluctant to push the rate all the way to the floor?

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Charlie Chase

30 July, 04:14

During the last half of 2008, the Fed seemed to take "baby steps" in reducing the federal-funds rate target, before finally lowering it to zero. Why can't the Fed push the rate any lower than zero? Why do you think that the Fed was so seemingly reluctant to push the rate all the way to the floor?

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Tristan Norman · Answer 1

Why can't the Fed push the rate any lower than zero?

Real interest rates can be lower than zero, or negative (because inflation rate is higher than interest rate), but nominal interest rates are generally only limited to zero. But during this same time, the European Central Bank actually started paying negative interest rates on money deposits and many European private banks followed. That means that they charged people for having their money on the bank.

Why do you think that the Fed was so seemingly reluctant to push the rate all the way to the floor?

The reason why the Fed was not willing to push the interest rates to zero or even below zero was that by doing so, the US dollar would have depreciated or lost value. In Europe this was done to encourage people to spend their money and not save as much, but in the US that is not really a problem. Generally in the US the problem is that people spend too much and save too little, but on some European countries and Japan, people tend to save too much. For example in Japan the national savings rate fluctuates between 22-40%, while the maximum savings rate in the US has been 10.4% in 1960, it currently is around 7.6%.