What tools does the Fed have left? Part 1: Negative interest rates


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The U.S. economy is currently growing and creating jobs, a situation I hope and expect will continue. We can’t rule out the possibility, though, that at some point in the next few years our economy will slow, perhaps significantly. How would the Federal Reserve respond? What tools remain in the monetary toolbox? In this and a subsequent post I’ll discuss some policy options the Fed might consider, focusing first on negative interest rates. Readers should also be aware of the March 21 conference at the Hutchins Center at Brookings on the tools remaining to monetary and fiscal policymakers should the economy deteriorate.

To anticipate, I’ll conclude in these two posts that the Fed is not out of ammunition, and that monetary policy could help cushion a possible future slowdown. That said, there are signs that monetary policy in the United States and other industrial countries is reaching its limits, which makes it even more important that the collective response to a slowdown involve other policies—particularly fiscal policy. A balanced monetary-fiscal response would both be more effective and also reduce the need to use unconventional monetary tools

http://www.brookings.edu/blogs/ben-bernanke/posts/2016/03/18-negative-interest-rates