LIQUIDITY TRAP TERRITORY….Paul Krugman says, basically, that the Fed has lost control of interest rates. Earlier this week the market reacted strongly to the fact that the Fed lowered the fed funds rate by “only” 75 basis points (to 2.25%), but Krugman points out that, Fed targets notwithstanding, short term T-bill rates are already close to zero anyway:
Since open-market operations take place in Treasuries, I take this to mean that the Fed may not actually be able to reduce short-term rates much from current levels — which means, in turn, that conventional monetary policy has been taken off the table. As Brad says, be afraid — be somewhat afraid.
When Japan got stuck in a liquidity trap in the early 1990s, it took them about a decade to work their way out of it. Consider me somewhat afraid.