[lbo-talk] Krugman on interest rate weirdness

Michael Pollak mpollak at panix.com
Mon Mar 24 13:52:32 PDT 2008


On Mon, 24 Mar 2008, Doug Henwood wrote:


>> then no matter how much the Fed floods the market, they can't to push
>> the treasury rate below zero. And if this spread persisted, the Fed
>> rate would then be stuck at 1.75%.
>
> But the Fed's target is 2.25%, meaning that they add and remove reserves
> in order to hit it. So there's no "problem" to solve or anomaly to
> explain.

Sure, but remember, his original question was the wonkish one of whether the Fed could cut the Fed Funds rate to 1% by the end of the year (as Citi economists expect):

http://krugman.blogs.nytimes.com/2008/03/20/fed-funds-question-seriously-wonkish-and-possibly-dumb-too/

And he's saying: maybe they actually can't. In which case, that's interesting and maybe later could be important. (He later quotes Brad Delong's tag line and say "Be afraid -- be somewhat afraid.")

Michael



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