SAN FRANCISCO, Nov 21 — As US Federal Reserve officials hone their monetary policy playbook in preparation for the next economic downturn, it appears they will eschew more controversial approaches tried by other global central banks, including one that President Donald Trump has called on the Fed to try.
Minutes of the Fed’s late October meeting, released yesterday, show US central bankers jettisoning any real consideration of using negative interest rates to stimulate the economy.
Trump has repeatedly urged the Fed to lower rates to below zero, arguing that negative rates in Europe and elsewhere give those countries a competitive advantage.
The minutes make clear that not only is the Fed unwilling to use negative rates now, when the US economy is growing, but it is also deeply sceptical of their use even in a recession.
All 17 policymakers agreed that pushing borrowing costs below zero “did not appear to be an attractive monetary policy tool in the United States”, according to the minutes.
Policymakers were also unenthusiastic about using bond-buying to target long-term rates, with some arguing that doing so could be seen as interfering with the Treasury’s managing of the nation’s debt, and others worried could balloon the Fed’s balance sheet.
“The minutes gave the strong impression that the Fed will stick to the playbook of the Great Recession... even though many members recognised that the power of these instruments will be lower than it used to be,” wrote Roberto Perli, an economist at Cornerstone Macro.
The discussion was part of a broad review of the Fed’s strategies for meeting its Congressional mandates of stable inflation and full employment.
The effort, begun early this year and expected to wrap up in mid-2020, has included extensive discussion of whether the Fed should revamp its approach to inflation so as to ensure it does not linger too long below its 2 per cent goal.
Most Fed policymakers believe it may need to make some changes to ensure it has enough firepower to fight the next downturn. But some have raised doubts whether the process will lead to any wholesale changes in how the Fed conducts its business.
Policymakers in October did discuss a range of ways to strengthen their existing policy tools, including how to beef up their use of forward guidance — interest-rate policies designed to encourage more investment and spending than otherwise.
They also discussed how best to make their bond-buying effective, come next recession, but stopped short of reaching any conclusion. — Reuters
