Janet Yellen argued Tuesday that the Fed has tools available to stimulate the economy should its growth falter, but conspicuously left negative interest rates off the list of possibilities the central bank would contemplate.
If the economy slowed and the Fed were forced to cut its interest rate target back to zero, Yellen said in a speech delivered in New York, “we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis” to support the economy.
Those tools included quantitative easing, or large-scale bond purchases, a policy that saw the Fed’s balance sheet explode from under $1 trillion before the crisis to $4.5 trillion now. Another method it used was to simply promise to hold rates at zero for longer, a policy known as “forward guidance.” A third, employed in 2011, was known as “Operation Twist”: The Fed sold short-term bonds and bought longer-term ones, placing downward pressure on long-term interest rates.
Left off Yellen’s list was negative interest rates, a concept that has generated a large amount of commentary and suspicion from the press and investors in recent months.
With negative interest rates, lenders would pay borrowers small amounts to take their cash. Some central banks recently have implemented negative rates successfully because they have discovered that it’s cheaper, in some cases, for firms to pay borrowers rather than to figure out the logistics necessary to hold huge amounts of money in cash.
A policy of negative interest rates has received some limited support, including from Yellen’s predecessor, Ben Bernanke. Yet Yellen has dismissed talk of negative interest rates as an idea not under discussion at the Fed.
Instead, if it became necessary to ramp up Fed stimulus, Yellen said Tuesday, she would turn to bond purchases and forward guidance, because the Fed “used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.”
In a question-and-answer session after her speech, Yellen acknowledged that the Fed’s use of such unconventional measures has been “a blend or mix of policies that is not as healthy as I would ideally like,” but maintained that it has worked as a whole.
She added that she would prefer Congress to take on more of the responsibity for stimulating the economy through government spending in a future downturn, although she noted that the high federal debt is a reason to be skeptical of fiscal stimulus.
In her remarks, Yellen also noted that investors are doing a better job of anticipating the Fed’s reaction to good news or bad news about the economy, often moving interest rates before the Fed announces its intention to do so. The dynamic of markets moving without the Fed even announcing any policy change serves as an “automatic stabilizer,” she said.
