Fed, in major shift, floods system with cash Nov. 26, 2008
This week's move by the Treasury and Federal Reserve to inject another $800 billion into the financial system opens yet another chapter in the government's continually evolving response to the financial crisis. But the announcement reflects a policy that has been evolving behind the scenes at the Federal Reserve for months with little fanfare.
Add one more acronym to the alphabet soup of financial rescue programs: zero interest rate policy, or ZIRP. But ZIRP is not just another bailout program.
ZIRP represents a major shift in the Fed's monetary policy, which typically involves managing lending rates and adding or draining cash to the banking system. But the central bank is running out of room to lower interest rates, and banks are hoarding much of the fresh cash they have received from the Treasury. So the Fed is bypassing the banking system and pumping money directly into the financial system to try to revive economic growth.
As nominal short-term interest rates have approached zero, the Federal Reserve under Chairman Ben Bernanke has injected hundreds of billions of dollars into the economy through a variety of programs, with varying degrees of success. Since early September, the value of assets held by the Fed has exploded from about $950 billion to more than $2.2 trillion — not including Tuesday’s announced purchases.
"The U.S. recession is set to get worse — a lot worse — in the next couple of quarters,” said Nariman Behravesh, chief economist at IHS Global Insight in a note to clients Tuesday.
Behravesh estimates that if Congress and the Obama administration pass a new economic stimulus package worth $500 billion to $700 billion, it could add about 1 percentage point to growth in 2009 and 2010. But he says it’s probably won’t come soon enough to boost growth in the first half of 2009.
“We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program,” he said.
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