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Target Fed funds rate likely to remain zero

Fed's actions were necessary

On Saturday, May 23, 2009, Donald Kohn, vice chairman of the Federal Reserve, addressed a conference on monetary policy and the current economic crisis at Princeton University. In his speech, Kohn said that had the Fed not taken some of the actions it has taken in response to the crisis the economic results would have been far worse. He also said the target federal funds rate will likely remain at zero "for some time."

Kohn noted that the Fed has announced its intentions to purchase up to $1.75 trillion in longer-term Treasury notes and bonds, agency debt and agency mortgage-backed securities in the coming year, and this program should "stimulate real economic activity by holding down intermediate- and long-term rates by bringing down the term premium on these securities."

Early indicators, according to Kohn, suggest this program "so far has worked."

"In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," said Kohn. "As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate."

Click here to read the speech: http://www.federalreserve.gov/newsevents/speech/kohn20090523a.htm.

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