When I was studying macroeconomics, I was fascinated with the idea of a liquidity trap. A liquidity trap is where the interest rates are effectively 0% and the central bank can no longer lower interest rates in an attempt to further stimulate the economy.
I never really thought about it happening here.
NEW YORK (CNNMoney.com) — In its latest effort to try and stimulate the U.S. economy, the Federal Reserve cut its key interest rate to a range of between zero percent and 0.25%, and said it expects to keep rates near that unprecedented low level for some time to come.
The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.
Taking the rate so close to zero leaves the Fed with little room for additional moves if the economy does not start to show signs of improvement soon.
IMHO, the Fed and Treasury are making thing worse by flailing around in a panicked attempt to DO SOMETHING NOW!!!.
They’re causing uncertainty in the market, and uncertainty is just about the worst thing there is for a market trying to recover from a financial crises.