Fed Ideal Interest Rate at -5%

Staff research at the Federal Reserve calculated the ideal interest rate for the US economy at negative 5%, according to analysis prepared ahead of the Fed’s latest policy meeting. The assessment, taking into account the Fed cannot cut rates below zero, sized up some “unconventional” operations that could result in the desired effect, including the expansion of the Fed’s asset purchases beyond the $1.15trn already committed, Financial Times reported. Critics typically greet the expansion of the Fed’s balance sheet as evidence of monetary creation that risks long-term inflation. The Fed’s balance sheet, for example, sits about 150% above its value at the same time last year, according to a balance sheet summary released Thursday. The data show the Fed’s consolidated balance sheet rose to a value of $2.17trn in the week ending April 22, up $70.36bn from $2.09trn the week before, and up $1.3trn from the year-ago week ended April 23, 2008. Fed staff analyzers based the suggestion to expand the assets purchased and indirectly push rates below zero on the Taylor rule, which calculates the desired interest rate from the difference between actual gross domestic product (GDP) and potential GDP — also seen as unemployment — and between actual inflation and target inflation rates, Financial Times reported. The suggestion, however may not affect the policy decisions at the Fed’s next meeting. Fed sources told Financial Times they expect to keep rates near zero for possibly the next two years. Although statements out of the Federal Open Market Committee in recent months support the Fed’s view of inflationary pressures remaining below even desired levels for some time, the committee recently began to project the need for changing monetary policy once demand returns, to prevent inflation. In other words: As demand recovers, the Fed must remove or neutralize some of the new money pumped into the system by its bloated balance sheet. Write to Diana Golobay at [email protected].