By Edward Kean, BridgeNews
Washington--Feb. 6--The Federal Reserve will need to lower its short-term interest rate target at least another 100 basis points to boost currently sluggish U.S. economic growth, Goldman Sachs said Tuesday.
* * * In a written commentary, Goldman Sachs economist Jan Hatzius said the Fed needs to shift its monetary policy to an "accommodative" stance in light of the economy's present weakness.
The Fed's main short-term interest rate target, the federal funds rate, now stands at 5.5%. The fed funds rate is the rate commercial banks charge one another for overnight loans. The Fed influences the rate by changing the cost and availability of bank reserves.
Hatzius said the current federal funds rate represents a "broadly neutral" monetary policy stance, neither boosting nor restricting overall economic growth.
"Given sluggish growth and substantial recession risks, we expect the Fed to push the rates significantly below their neutral level," he wrote. The Fed's economic model suggests the Fed would need to cut short-term rates at least another full percentage to boost overall economic growth by 1 percentage point, Hatzius wrote. There is a risk that rate cuts of more than 1 percentage point might be needed, Hatzius added.
Economists often track the so-called real or inflation-adjusted federal funds rate to gauge whether Fed policy is restrictive, expansionary or neutral.
However, estimates of the real federal funds rate often vary among economists, depending upon, among other things, estimates of the inflation rate.
Federal Reserve Chairman Alan Greenspan also has mentioned the real federal funds rate in his Congressional testimony.
Last July, Greenspan told Congress that the Fed had raised rates to "relatively high levels," after adjusting for inflation. At the time Greenspan made that statement, the fed funds target was 6.50%, one percentage point above its present level.
Hatzius estimated that the current real federal funds rate is about 3.5%, roughly in line with estimates of how fast the economy can grow over the long-term and thus consistent with a "neutral" stance.
Last month, IMF research director Michael Mussa told BridgeNews that a Fed funds target rate of 5.0%-5.5% would be a "neutral" stance. And former Fed Governor Susan Phillips last month said the Fed probably would need to bring interest rates to below a perceived "neutral" level. End
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