Fed Staff Sees Ideal US Interest Rates at -5%

Chief U.S. economic correspondent for the Financial Times Krishna Guha says the ideal interest rate for the US economy in current conditions would be minus 5%, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

From FT: 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…suggested that the Fed should expand its asset purchases by even more than the $1,150bn..increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

The Fed is not likely to embark on any substantial new programmes…though policymakers probably still see these risks as overall weighted to the downside.

This could set the stage for a more detailed discussion of the framework that will ultimately govern the Fed’s exit strategy.

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