The United States needs quick, forceful action in fighting the next recession with interest rates that should be lower for longer, Federal Reserve Governor Lael Brainard said in a speech on Friday
WASHINGTON (Pakistan Point News / Sputnik - 22nd February, 2020) The United States needs quick, forceful action in fighting the next recession with interest rates that should be lower for longer, Federal Reserve Governor Lael Brainard said in a speech on Friday.
"We should clarify in advance that we will deploy a broader set of tools proactively to provide accommodation when shocks are likely to push the policy rate to its lower bound," Brainard said at a forum on monetary policy held by the University of Chicago's Booth School of Business. "Equally important, we should adopt a strategy that successfully achieves maximum employment and average inflation outcomes of 2 percent over time."
Brainard, who, among other roles, serves as the Federal Reserve's chair on financial stability, said the central bank's current experience showed that a long period of monetary easing was vital for nursing the economy back from recession.
"With price inflation showing little sensitivity to resource utilization, policy may have to remain accommodative for a long time to achieve 2 percent inflation following a period of undershooting," she said.
But she said it would also not be wrong for the central bank's policy-making committee to set early limits on rate movements and tweak them along the way.
"To strengthen the credibility of the forward guidance, interest rate caps could be implemented in tandem as a commitment mechanism," she said. "Based on its assessment of how long it is likely to take to achieve full employment and target inflation, the Committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance. Of course, if the outlook shifted materially, the Committee could reassess how long it will take to reach its goals and adjust policy accordingly."
Based on previous recessions, unconventional tools were implemented only after long delays and debate, which sapped confidence, tightened financial conditions, and weakened recovery, Brainard said.
"The delays often reflected concerns about the putative costs and risks of these policies, such as stoking high inflation and impairing market functioning," she said. "These costs and risks did not materialize or proved manageable, and I expect these tools to be deployed more forcefully and readily in the future."
But while forward guidance could be helpful in a crisis, it would also take time for policy makers to recognize the importance of conditioning such guidance on specific outcomes or dates and ensure the full set of policy tools were, she said.
"In several cases, the targeted outcomes set too low a bar, which in turn diminished market expectations regarding monetary accommodation," Brainard said. "In some cases, expectations regarding the timing of liftoff and asset purchase tapering worked at cross-purposes."
Finally, in a so-called "fog of war", it will be difficult for policymakers to distinguish clearly between temporary headwinds associated with the crisis and emerging structural features of the "new normal," Brainard added.