Yellen Says Fed Could Expand Its Use of Bond Purchases
August 29 2016 - 12:30AM
Dow Jones News
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.
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."
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.
Write to Harriet Torry at harriet.torry@wsj.com and Jon
Hilsenrath at jon.hilsenrath@wsj.com
(END) Dow Jones Newswires
August 29, 2016 00:15 ET (04:15 GMT)
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