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By Peronet Despeignes
Financial Times
March 24, 2002
http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3ZO6O38ZC&;
live=true&tagid=IXLTN37YICC&subheading=currencies%20&%20money
WASHINGTON -- The U.S. Federal Reserve in January
considered a variety of "unconventional" emergency
measures to be taken if cutting short-term interest rates
failed to arrest a U.S. recession and prevent
Japanese-style deflation. One of those steps may have
been a plan to buy U.S. stocks.
According to minutes of its January 25-26 meeting, the
Fed's policy-making Open Market Committee agreed
"unconventional policy measures might be available"
to deal with a situation in which "the economy were to
deteriorate substantially in a period when nominal
short-term interest rates were already at very low
levels," although, it said, the efficacy of such measures
was "uncertain." The minutes vaguely mention internal
analyses of such a scenario.
The discussion appeared largely academic, conducted
at a time when the year-long recession was drawing to
a close. But the topic was apparently brought up in the
context of concerns that the United States could have
faced -- and might face in the future -- a dilemma in which
short-term interest rates were so low as to be rendered
ineffective as a monetary policy tool.
Minutes which summarised the meeting were released
last week. A full transcript will not be available for five
years but a senior Fed official who attended the meeting
said the reference to "unconventional means" was
"commonly understood by academics."
The official, who asked not to be named, would not
elaborate but mentioned "buying U.S. equities" as an
example of such possible measures, and later said the
Fed "could theoretically buy anything to pump money
into the system," including "state and local debt, real
estate, and gold mines -- any asset."
The Fed currently relies on the buying and selling of
Treasury bonds as a way of targeting short-term interest
rates.
In its fight against the economic downturn, the Fed has
reduced the Fed funds rate from a 10-year high of 6.5
percent to a 40-year low of 1.75 percent. The moves
prompted speculation last year among some
economists that short-term interest rates might at some
point hit zero and that interest-rate policy might become
useless.
The minutes said FOMC members agreed this scenario
was "highly remote, but could not be dismissed altogether."
While not mentioned in the minutes, Fed officials
appeared to have in mind the example of Japan, an
economy mired in a decade-long slump. Deflation -- or
falling prices -- and other problems have led the central
bank to cut short-term interest rates to practically zero.
The minutes said Fed officials considered a similar
U.S. scenario and concluded: "If in the future such
circumstances appeared to be in the process of
materialising [in the United States], a case could be
made at that point for taking pre-emptive easing
actions, to help guard against the potential development
of economic weakness and price declines that could be
associated with the so-called 'zero bound' policy
constraint."
This "zero bound" scenario -- in which the Fed funds
rate would hit zero -- has been discussed before by
policymakers as the Fed has succeeded in driving
inflation to 30-year lows. But talk of "unconventional
policy measures" has never appeared in FOMC
minutes.
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