Aug. 27, 2016 10:12 a.m. ET
JACKSON HOLE, Wyo.—When recession hits again, the Federal Reserve could turn back to unconventional programs it used with aggression in the last crisis, Federal Reserve Chairwoman Janet Yellen said Friday in taking stock of the central bank’s long-run plans for managing the ups and downs of the economy.
The Fed traditionally cuts short-term interest rates when recession hits, as part of an effort to spur borrowing, spending and investing. But rates are near zero and aren’t expected to go much higher, leaving the Fed in a search for weapons for when the next recession hits.
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Ms. Yellen said the Fed’s main tool could be bond-purchase programs, which the Fed used during and after the 2008-09 financial crisis, expanding its portfolio of assets to more than to $4 trillion today.
“In addition to taking the federal-funds rate back down to nearly zero, the [Federal Open Market Committee] could resume asset purchases and announce its intention to keep the federal-funds rate at this level until conditions had improved markedly,” Ms. Yellen said. She cautioned however that “with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced.”
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What was striking was also what she left out of her playbook for battling future recessions; there was no mention in her comments of negative interest rates, an approach tried by the Bank of Japan, European Central Bank and other central banks in Europe.
She also played down some controversial ideas being debated by economists and policy makers in her remarks at the Federal Reserve Bank of Kansas City’s annual economic symposium.
Just weeks after San Francisco Fed President John Williams made the case for considering a higher inflation target as a way to adapt to the new world of lower interest rates, Ms. Yellen said the Fed isn’t considering changing its 2% inflation objective. Nor is the Fed considering an economic growth target to set monetary policy, Ms. Yellen told attendees from central banks around the globe.
Instead she argued that the main tools in the Fed’s box—bond-buying and statements about the likely path of rates, known as forward guidance—remain adequate.
The Fed has built up a portfolio of $2.5 trillion in Treasury securities and $1.8 trillion of mortgage-backed securities through its asset-purchase programs. Ms. Yellen said in the future it might seek to look beyond those asset classes for purchases. The Bank of Japan has purchased exchange-traded funds and the ECB is buying corporate debt.
Other programs developed after the crisis could become a long-run feature of Fed policy. They include Fed payments of interest to banks on the reserves they keep on deposit with the central bank as a way to manage interest rates.
Fed officials’ forecasts suggest the Fed’s benchmark federal-funds rate will settle around 3% in the longer run.
“We expect to have less scope for interest-rate cuts than we have had historically,” she said.
Ms. Yellen leaned on a recent research paper by Fed senior economist David Reifschneider, which argues that bond purchases and low-rate promises ought to be enough for the Fed to manage even a fairly severe recession.
Ms. Yellen’s outline of future monetary-policy frameworks follows months of research on the topic at the Fed. Minutes of the Fed’s July meeting suggested there was little appetite at the central bank for considering more-radical policy steps before first gaining “more information about some important considerations that are still evolving, including financial regulations and market participants’ responses to them.”
At the last gathering of the interest-rate-setting Federal Open Market Committee, staff briefed officials on analysis they started a year ago of foreign central banks’ experiences of policies including negative rates, according to minutes of the July 26-27 meeting.
“In the discussion that followed the staff presentations, policy makers agreed that decisions regarding an appropriate long-run implementation framework would not be necessary for some time,” the minutes said.
In her speech Friday, Ms. Yellen called on actors outside the monetary policy realm to do more to boost economic growth in the longer run. In the years since the financial crisis, monetary-policy makers around the world have fretted that an overreliance on monetary policy has caused governments to shy from crucial structural reforms. Central bankers have also called for fiscal measures to boost productivity growth—a call Ms. Yellen repeated in Jackson Hole.
“Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals,” she said.
Tags: Bank of Japan has purchased exchange-traded funds, David Reifschneider, ECB is buying corporate debt, Federal Reserve, Federal Reserve Bank of Kansas City, forward guidance, increasing bond purchases, Janet Yellen, mortgage-backed securities, negative interest rates, San Francisco Fed President John Williams