JP Morgan Predicts that the Fed Rate Will Go to Zero

November 20, 2008

Will we see 0% for the Fed?Will the Fed really be offering free money in the coming months? Some think so. JP Morgan is predicting that the Fed rate will be cut to 0% in the coming two months, slowly inching down in an effort to boost the U.S. economy.

Right now, there is some worry that deflation is about to set in, harming the U.S. economy, and inflation is likely to be used as a counter-strike. However, things may not work out perfectly for the Fed if this happens, reports Bloomberg:

“Taking the target rate to zero percent would not be costless for the Fed,” Feroli said. Public confidence may drop “if there is a perception that the Fed has `run out of ammo.”’

Indeed, dropping the Fed rate to 0% might be taken as a sign of defeat. And besides, what can the Fed do beyond that? Sure, it’s possible to go negative and start paying people to take money, but that’s getting a little extreme (and the scenario is unlikely).

At any rate, the Fed isn’t the only country that’s getting lower in terms of interest rate. The Swiss National Bank just cut its rate by 100 basis points, and both the European Central Bank and the Bank of England are conceding that they may cut rates.

And don’t forget the Bank of Japan. It’s practically at 0% already, with a rate of 0.3%.