Wednesday, January 30, 2008

What If the Fed Dropped the Fed Funds Rate Below Zero?

The Fed dropped rates again today. The Fed funds rate now stands at 3 percent. Most think there's only so far it can go (like zero, and they won't go that low).

But what if they could and did?

What would it mean? Would the dollar get a new use as kindling? Would people start taking taxis rather than riding the bus (you pay for a bus ride at the beginning of your trip, a taxi at the end)?

Would the US economy implode? Would countries who seemingly peg their currency to the US Dollar, like China, implode, too?

What would banks do if, for every dollar they borrowed from the Fed, they got $1.10? That would "create" a lot of money. Would they even bother to lend it out?