A paper by Glenn D. Rudebusch, a senior vice president and associate director of research at the San Francisco Federal Reserve, argues that ZIRP (Zero Interest Rate Policy) could be with us for years here in the U.S., news that savers in a savings-short country are no doubt scratching their collective heads about. This report in the New York Times has the details:

“Fed staff economists rarely come so close to making specific forecasts of — or recommendations for — monetary policy, but I suspect Glenn’s views are shared by many others on the staff,” said Joseph E. Gagnon, a former Fed economist and now a senior fellow at the Peterson Institute for International Economics.

Mr. Rudebusch concluded from Fed decisions over the last two decades that there was a statistical relationship between core consumer price inflation and the gap between actual unemployment and the natural, or normal, rate of unemployment.

Given that relationship, as the recession worsened and inflation slowed, the Fed should have lowered the federal funds rate by another 5 percent, Mr. Rudebusch wrote. In reality, since the Fed had already hit what it calls the “zero lower bound,” this was impossible; the central bank left its target range for the fed funds rate at zero to 0.25 percent.

“To deliver future monetary stimulus consistent with the past— and ignoring the zero lower bound — the funds rate would be negative until late 2012,” Mr. Rudebusch wrote. “In practice, this suggests little need to raise the funds rate target above its zero lower bound anytime soon.”

There’s more on this subject at both Calculated Risk and Zero Hedge, the latter suggesting “the passage of legislation which allows negative fed fund rates: when all else fails, US citizens will be directly penalized to save money”.

Future historians will surely have fun with studies like this one when they look back in a decade or two, likely shaking their heads and thinking, “I can’t believe they were still looking at the relationship between unemployment and inflation in 2010 after that useless gauge of consumer prices had failed to provide any information relative to the  series of highly destructive asset bubbles that continued to sweep through the global economy” .