Two former top staffers at the Federal Reserve have joined in urging the Fed to say explicitly what it will do if interest rates hit zero again
WASHINGTON - Two former top staffers at the U.S. Federal Reserve have joined in urging the Fed to say explicitly what it will do if interest rates hit zero again, and warned that even with the best laid plan the central bank “might simply run out of...firepower,” if a downturn is bad enough.
Once rates hit zero a central bank loses its most familiar way to support the economy and has to consider less conventional tools such as “forward guidance” about rates or the bondbuying that beefed up the Fed’s balance sheet to more than $4 trillion in the post-crisis years. By boosting demand for bonds, the Fed aims to lower interest rates for related securities like home mortgages, thus encouraging homebuying, for example.
The paper, released through the Peterson Institute for International Economics, is the third high-level call this year for the Fed to use detailed guidance about rates as a main tool in recession fighting, a complement to bondbuying that gives households and investors a clear sense of how long credit costs will remain low.
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