The Fed studies “unconventional” economic policy
In his speech on Friday, the president of the Federal Reserve of the United States, Jerome Powell admitted that, although the strategies implemented by the Fed have been effective, the agency is examining what other strategies could allow it to reach inflation of 2 %.
“We are analyzing whether our existing monetary policy tools will be adequate when the next recession comes. Finally, we are asking if our communication practices can be improved to better support the effectiveness of our policy, ”Powell said in his speech, which you can read in full here.
Powell also said that if interest rates are too low, “the Fed and other central banks have less space to reduce rates to support the economy during recessions.”
Gabriela Siller, Director of Financial Economic Analysis of Banco Base, comments because the current US interest rates provide a low room for maneuver, the Fed could be studying unconventional monetary policy strategies, in reference to liquidity injections through the “repos”, among other strategies.
Siller is struck by the fact that Powell says that the US economy “is fine”, he also speaks of “risks” and that, if these really increase and materialize, causing an impact on the economy – such as a recession, for example, The agency and could not maneuver with interest rates.
“Between 2006 or 2007, the United States had a 5% rate, then a 4.75% decrease; fifteen months later, at a rate of 0%. If they now have a rate of 1.75% -2.00%, the Fed has a low margin, ”says Siller.
And the Fed has a low room for maneuver at times in increased parental risks, so if the United States could enter a recession – something that has no energy, but also does not rule-out tools to boost the economy.
“They are seeing more risks, whether due to lack of liquidity, the effects of the trade war or the policies related to Trump’s political trial,” says Siller.
“They are going to have to apply unconventional monetary policy. Yes I think they can make another cut, to carry out the rate to a range between 1.50 -1.75%. But then, in 2020, or in 2012, what will they do? They will no longer be able to cut more, especially if one takes into account that Powell already said that negative rates are counterproductive. ”
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