Less Than Zero

The economy's got so abominable
That constraints on the Fed are phenomenal,
But the will to inflate
Makes a negative rate
Seem potentially real, if not nominal.

Thanks to Marketplace radio, it has come to my attention that members of the general public are still concerned about the Fed's inability to drop interest rates below zero. Because of the so-called "zero lower bound" problem, it may seem that the Fed has run out of monetary tools to stimulate the economy. In terms of nominal interest rates, this is correct. That's why, according to Marketplace Money economics editor Chris Farrell, it may be time for the Fed to "get real":

The Fed can create a negative "real rate" under certain conditions. Two quick definitions: "Real" means adjusted for inflation and "nominal" means the stated rate. So if the fed funds rate is at zero (nominal) and inflation is running at 2.5 percent, the real rate (inflation-adjusted) is below zero. In other words, if the Fed's nominal rate is at 0 percent and the inflation rate is 2.5 percent, then the real rate of interest is -2.5 percent. The Fed could lower the real rate of interest by pushing for a higher rate of inflation -- say, 3 percent (for a -3 percent real rate). Among others, it's an approach that New York Times columnist and Nobel laureate Paul Krugman has written about favorably.