The Committee anticipates that weak economic conditions are likely
to warrant exceptionally low levels of the federal funds rate
for some time.
Another main reason behind the massive reduction in the federal-funds-rate
target is the suppression of emerging price deflation. The consumer
price index (CPI) fell by 1.7% in November from the month before.
This was the biggest monthly fall since 1947. (In July 1949 the
CPI fell by 0.9%.)
Most commentators regard deflation as a terrible thing that must
be countered as soon as possible. This is also the view of Federal
Reserve policymakers, in particular Fed Chairman Ben Bernanke. To
counter a possible deepening in price deflation the US central bank
– in addition to lowering the fed funds to zero – is pursuing
aggressive monetary pumping. In December the yearly rate of growth
of the Fed’s monetary pumping stood at 151.7% against 141.3% in
November and 2.6% in December 2007. As a result of the Fed’s pumping
its balance sheet jumped to $2.238 trillion from $0.9 trillion in
According to the latest
FOMC statement, the US central bank is likely to raise its balance
sheet further in the months ahead.