Jeremy Warner: Desperation Fed enters zero interest rate territory

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Outlook So that's it, then. With one great blast, the US Federal Reserve has fired off all that remains in the monetary cannon, reducing the Fed Funds rate to an unprecedented 0 to 0.25 per cent. In fact, this is only acknowledgement of what has been happening in the marketplace anyway. The Fed Fund rate has in practice been at around 0.3 per cent for some weeks now, not withstanding the official target rate of 1 per cent. Even so, there is no doubting the significance of yesterday's policy action. Zero per cent interest rates sont arrivés. Britain and perhaps even Europe may not be far behind.

As interest rates around the globe plummet, the Governor of the Bank of England is still bizarrely writing letters of explanation to the Chancellor on why inflation is so far above target, as under the terms of his remit, he must. Yet as he himself admits in yesterday's epistle, inflation is now falling with such speed that he may soon be writing the reverse letter to explain why the Bank is undershooting.

Some economists are already predicting that inflation, as measured by the Retail Price Index at least, will sink to zero and perhaps below at some stage towards the middle of next year. Only part of this is down to the VAT cut, reduced mortgage costs and the collapse in previously elevated energy, commodity and food prices. The rest, perhaps the bulk, is accounted for simply by an absence of demand.

Unfortunately, all this monetary easing doesn't seem to be making any difference. So what next? If it is the lack of availability rather than the cost of money that is the problem, creating more of it may be a more fruitful approach In the US, the collapse in economic activity is already forcing the Fed to move beyond conventional monetary policy – that's now all used up, anyway – to "unorthodox" policy action. Last night's statement from the Fed's Open Markets Committee is peppered with references to it. In layman's language, what the Fed is saying is that it won't hesitate to turn on the printing presses and flood the system with new money if that's what is deemed necessary to get the economy going again. Actually, the Fed has already done quite a bit of this by buying up large quantities of mortgage-backed securities.

We haven't seen these "unorthodox" policies applied in Britain yet but, like zero interest rates, it may be only a matter of time. We are in uncharted waters. Nobody quite knows where we are heading. What we do know is that the economic storm continues to build.