William Gavin, vice president of research at the Federal Reserve Bank of St. Louis, Mo., will lecture on federal funds interest rates at 6 p.m. today in Corwin Pavilion.
Gavin’s talk will focus on the market effects of a zero percent federal funds interest rate and how that target could potentially damage the economy. He will also present proposed policy modifications that can avoid the “trap” of the zero lower bound. A reception will precede the event at 5 p.m.
Gavin’s lecture is sponsored by the Laboratory for Aggregate Economics and Finance at UCSB — an organization formed to address and identify questions about fluctuations in national economies.
Even though low interest rates usually increase cash flow by allowing banks and consumers to borrow more money, Gavin said they can also exact a heavy financial toll.
“If you talk to your grandparents or people who are retired and have savings … when interest rates are zero it means no income,” he said. “Low interest rates aren’t good for everyone.”
Sam Hart, a third year business economics major, said he was unaware that a low interest rate was detrimental to the economy.
“It would be interesting to learn why a lower interest rate is a ‘trap,’ because I thought a lower interest rate would mean more economic activity,” Hart said.
According to Gavin, the Federal Reserve often lowers interest rates when it senses economic weakness. Additionally, he said modern macroeconomic models can explain the phenomenon of zero percent interest.
Rod Garratt, an economics professor, said the Federal Reserve doesn’t control interest rates, but influences them by buying or selling securities and bonds. A zero percent interest rate therefore limits its power.
Gavin said he will devote the final portion of his lecture to debunking inflation myths.
“Monetary policy is very uncertain at the moment … you have people saying completely opposite things,” he said. “The officials say we’re in uncharted territory. We’re really doing some of this stuff for the first time.”
Gavin is the editor in chief of the Federal Reserve Bank of St. Louis’ bimonthly journal and a member of the National Association of Business Economics, the Society for Economic Dynamics and the American Economic Association. Furthermore, he has taught as an adjunct professor of economics at Case Western Reserve University, Cleveland State University and Washington University in St. Louis.