According to a staff report from the Federal Reserve. From the Financial Times we learn the following:
The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting.Wow--expanding its money creation beyond the additional $1.15 trillion and keeping interest rates at zero another 18 months. Now that is some real anti-deflationary firepower. It also makes it incredibly challenging for the Federal Reserve to reverse itself once the recovery takes holds, more so than I previously imagined. As The Economist noted in a recent article, a "messier, more political future awaits" the Federal Reserve once this crisis is over.
The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.
A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.
Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorized at the last meeting, which included $300bn of Treasury purchases.
Still, many Fed officials expect they may well keep rates near zero for another 18 months to two years and some might see value in making this more explicit...