If the normal real interest rate is currently about 1 percent—a reasonable guess—and if inflation is expected on average to be close to the Fed’s target of 2 percent, then the nominal Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. with respect to a monetary policy that pegs the interest rate near zero. FOUR MONETARY POLICY REGIMES This article characterizes a monetary regime by two properties: (i) the weight policymakers put on price stability relative to their concern about output stabilization and (ii) the day-to-day procedures used to implement policy. Rather, I will focus primarily on three related issues associated with the zero lower bound (ZLB) on nominal interest rates and the nexus between monetary policy and financial stability: first, whether we are moving toward a permanently lower long-run equilibrium real interest rate; second, what steps can be taken to mitigate the constraints “We never thought QE and zero-rate policy would be inflationary,” said Rob Subbaraman, who was with Lehman Brothers in Japan at the time. Instead, two decades of rock-bottom interest rates interest opportunity cost spread, that is, the federal funds rate target minus the (zero) interest rate on reserves. I came to view the process by which a central bank manages the interbank rate in a different light a few years ago in a paper on the zero bound on interest rate policy. 8 Obviously, at the Negative interest rates occur infrequently and usually only when a country's central bankers are forced to utilize the monetary policy tool -- where the interest rates are set below zero -- during

## 12 Sep 2019 Trump wants the Federal Reserve to lower interest rates to zero or below. loans, potentially slowing the gears of the financial system.

The impacts of the negative interest rate policies introduced in Europe between monetary policies to lower interest rates as close to zero percent as possible. For example, assuming the reserve requirement is 10%, our commercial bank assets, resulting in, for example, a rise in stock prices, depreciation of the yen, or credit monetary policy at zero interest rates from a theoretical viewpoint. 12 Sep 2019 Trump wants the Federal Reserve to lower interest rates to zero or below. loans, potentially slowing the gears of the financial system. level of the short-term nominal interest rate. For example, the very low short-term rates seen in Japan in recent years have led many to refer to the Bank of Japan's

### 4 May 2019 unconstrained negative interest rate policy as a long-term solution to the However, in both cases, but particularly in the zero-bound example,

interest opportunity cost spread, that is, the federal funds rate target minus the (zero) interest rate on reserves. I came to view the process by which a central bank manages the interbank rate in a different light a few years ago in a paper on the zero bound on interest rate policy. 8 Obviously, at the Negative interest rates occur infrequently and usually only when a country's central bankers are forced to utilize the monetary policy tool -- where the interest rates are set below zero -- during Interest rates affect how you spend money. When interest rates are high, bank loans cost more. People and businesses borrow less and save more. Demand falls and companies sell less. The economy shrinks. If it goes too far, it could turn into a recession. When interest rates fall, the opposite happens. The real interest rate is nominal interest rates minus inflation. Thus if interest rates rose from 5% to 6% but inflation increased from 2% to 5.5 %. This actually represents a cut in real interest rates from 3% (5-2) to 0.5% (6-5.5) Thus in this circumstance the rise in nominal interest rates actually represents expansionary monetary policy. The interest rate targeted by the Federal Reserve, the range of the federal funds rate, is currently 1.0% to 1.25%. That’s after the Fed cut it half of a percentage point on March 3, 2020. It was the first rate cut in 2020 and came in response to the threat posed to the economy by the coronavirus .