The Fed was scared in 2002 and this paper sent them over the edge: "Preventing Deflation: Lessons From Japan's Experience in the 1990s"
federalreserve.gov
Perhaps they went too far. But it makes an interesting read; here are the first two paragraphs (quoting June,2002):
"Since the beginning of 2001, the U.S. federal funds rate has been reduced 475 basis points to a level of only 1.75 percent, the lowest it has been in about four decades. Concerns have arisen that, were a substantial further loosening of monetary conditions required, perhaps because of additional negative shocks to aggregate demand, monetary policy would be limited by the zero lower bound on nominal interest rates. It is debated what the Federal Reserve could do in such circumstances to support a recovery.
In this context, many observers naturally draw parallels between the U.S. situation at present and that experienced by Japan in the mid-1990s, when the Bank of Japan reduced interest rates to very low levels and the economy was on the brink of what turned out to be a protracted deflationary slump. Following the collapse of the asset price bubble in early 1990, Japanese growth steadily deteriorated through the first half of the 1990s, rebounded briefly at mid-decade, but has been generally weak since then. Consumer price inflation followed the economy downward, falling below zero in 1995. In response, Japanese short-term interest rates were lowered nearly to zero by late 1995 and have stayed close to zero ever since. However, with prices declining, real interest rates have remained positive, restraining growth." |
