Two decades of aughts in just 18 years

The beginning of each century is marked by a decade known as the aughts. This is the period of time between the turn of the century and the end of the 10th year. If the economy is not careful, our new millennium may have two decade of aughts before it is twenty years old.

At the end of this year, the Federal Reserve’s zero interest rate policy will be five years old. It was December 2008 when the central bank moved its target of the overnight interest rate to essentially nil. Since that time the U.S. economy completed the worst recession since the great depression and has only managed to advance slowly. This tepid recovery has prompted the central bank to keep rates at virtually zero and implement other unconventional monetary policies like “operation twist” (which has already expired), “quantitative easing” (the ongoing money creation), and the use of “forward guidance” in order to prop up the economy.

Before the overnight interest rate is increased, the unconventional monetary policies will be removed. Quantitative easing will be diminished via “tapering” which simply means money will be created more slowly over a period of time. Finally, the bankers will likely alter the tone of their guidance ahead of changing the targeted overnight interest rate.

In the meantime, some of their recent guidance has stated a few targets should be met before moving the interest rate higher. These include inflation figures above two percent and improvements in the labor market. In December 2012, the Federal Reserve wrote in is official statement that it expects the “…exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½%.” In a presentation to the UC San Diego Economic Roundtable, John Williams, the President of the San Francisco Federal Reserve Bank, noted their use of “at least as long” as an indication that there is no statistic that will automatically cause the central bank to increase interest rates.

John Williams’ own forecast does not show the unemployment rate hitting the 6½ percent level until 2015. By that time the second period of aughts will be roughly 7 years old. What’s another three years? (by C. Cox)