21 March, AtoZForex, Lagos – With the recent policy stance by the Federal Reserve on the US economy, as well as policy actions by other leading central banks in other developed countries, former Fed chairman Ben Bernanke thinks US monetary policy “is reaching its limits.” Although he agrees the Federal Reserve has not yet run out of responses to a potential slowdown.
In a recent blog post, Ben Bernanke argued that a “balanced monetary-fiscal response would boost the economy better than monetary tools alone.” While speaking of negative interest rates, he agrees that negative interest rates hold “modest benefits” for the US economy, but US monetary policy makers are unlikely to opt for this path.
“I assess the probability that this tool will be used in the U.S. as quite low for the foreseeable future. Nevertheless, it would probably be worthwhile for the Fed to conduct further analysis of this option,” Bernanke argued.
Rate hike expectation
At last week’s FOMC, the Fed opted to hold target short-term interest rate range at 0.25 percent to 0.5 percent. The US central bank clarified it could now hike twice this year, unlike its prior expectation of a four time rate hike. However, with rates remaining well below historical averages, it leaves observers wondering what the Fed’s action will be in response to another potential slowdown.
Potential actions which the central bank could opt for includes the use of forward guidance, or “talking down” longer-term rates, while also convincing markets that short-term rates will remain low. Also, if economic conditions deteriorated to require a stronger response, the Fed may again consider quantitative easing, according to Bernanke.
Another round of Quantitative easing?
However, another round of quantitative easing (QE) could throw markets into a frenzy, which may consequently not prove as effective as when it was used after the financial crisis, Bernanke argued. Speaking of another potential round of QE, on Wednesday, Fed Chair Janet Yellen said the central bank had not “actively” discussed the US monetary policy move.
“What I would like to make clear is that this is not actively a subject that we are considering or discussing. The committee continues to feel that we are on a course where the economy is improving and inflation is moving back up,” Yellen said.
Think we missed something? Let us know down in the comments section.