The period of ultra-loose monetary policy will forever be associated with the Great Recession and its lingering fallout. So does the Federal Reserve’s latest rate hike signal the beginning of the end of this unprecedented period of accommodative monetary policy?

The Fed raised the benchmark federal funds rate 25 basis points on March 15 to a range of 0.75% to 1% in what was the third hike since the financial crisis. While the latest rate increase is surely a sign that the world’s largest economy is on a much firmer footing, it may not necessarily spell the end of loose monetary policy. Fed Chair Janet Yellen has sounded notes of caution about aspects of the economy and, in particular, stubbornly high unemployment. So the possibility of further rate cuts is not completely off the table.

Economists have long pondered what the long-term effects will be of this period of low interest rates and quantitative easing (QE). In the short-term, it has no doubt injected liquidity into the system and given investors incentive to purchase other assets. It has also kept interest rate payments on bonds depressed at a time when Governments are still exercising some form of fiscal caution. But the question occupying economist minds now is not so much that of the long-term impact of ultra-loose monetary policy but what will happen when more central banks begin to pull the plug.

Meanwhile, many in the financial services industry have been asking themselves a bigger and more pertinent question — what will happen if another recession suddenly strikes? With interest rates still so low and QE still in effect across the Eurozone and Japan, an economic shock could leave many countries vulnerable and with a lack of monetary tools.

But what this recession should have taught us is that unconventional situations require unconventional responses. Just as QE was an unorthodox measure pursued in the early 2010s, central banks still have some options in their toolbox should Governments not want to resort to fiscal action. In a series of blogposts, former Fed Chair Ben Bernanke has raised the specter of three policy choices central banks could pursue: negative interest rates, targeting long term interest rates and helicopter money.

Negative interest rates are already in effect in several countries (Denmark, Japan, etc). Under this measure, rather than banks receiving interest on reserves held with central banks, they are charged a fee on reserves above a certain threshold. The end goal is to make banks shift to short term assets, pushing down their yields. This will (hopefully) result in declines in a broad range of longer-term interest rates (mortgage rates, corporate bond yields).

The policy has been met with a mixed reception. Some believe banks will simply pass on the cost of holding reserves to customers who, in turn, will withdraw savings and hoard cash — hurting the very financial institutes such a policy is meant to help.

Long-term interest rates could be an alternative. Central banks have generally targeted short-term interest rates, but have pegged interest to long term treasury debt in the past (noticeably during WW2). To see how such a peg could function, imagine the overnight interest rate is 1% and the five-year Treasury rate is 3%. The central bank would announce it intends to hold the five-year Treasury rate at 2% or less and stand ready to buy any Treasury security maturing up to five years at a price corresponding to a return of 2%. Given the inverse relationship between yield and bond price, the central bank would effectively be offering to pay more than the initial market value.

The problem here is credibility. How can investors be sure central banks will hold interest rates down? Any serious doubts could see investors sell off their treasury bills en masse, leaving the central bank owning most of them and generating much uncertainty over interest rates.

Helicopter money, meanwhile, is an unconventional tool intended to give a one-time tax rebate for the entire population financed by an expansion in money supply that will never be repeated. In theory, this should stimulate consumer spending and increase inflation. However, much like long-term interest rates, there is a problem with credibility. How can central banks guarantee it will be a one-off occurrence? And how will they co-ordinate with the legislature to implement the policy?

The problem with unorthodox policies is precisely in the name: they are unconventional and each one carries a different set of risks that could end up backfiring. While it is extremely unlikely that these policies will be implemented, their mere existence should ease fears expressed by many in the financial industry about the limits of monetary policy. While central banks cannot solve everything, they still have a few tricks up their sleeves should things truly turn sour.

Tags:

502 Comments

  1. Pingback: canada pharmacy
  2. Pingback: Viagra 20 mg
  3. Pingback: Discount viagra
  4. Pingback: Cialis generic
  5. Pingback: buy viagra delhi
  6. Pingback: levitra
  7. Pingback: sildenafil 100mg
  8. Pingback: viagra on line
  9. Pingback: pharmacies
  10. Pingback: online pharmacies
  11. Pingback: pharmacy
  12. Pingback: cheap cialis
  13. Pingback: cialis generic
  14. Pingback: tadalafil generic
  15. Pingback: cialis generic
  16. Pingback: online pharmacy
  17. Pingback: sildenafil
  18. Pingback: genericvgrmax.com
  19. Pingback: 3 гдз
  20. Pingback: canpharmb3.com
  21. Pingback: ciapwronline.com
  22. Pingback: genfio.com
  23. Pingback: fioricet2020.com
  24. Pingback: levitra generic
  25. Pingback: viagra online
  26. Pingback: viagra on sale
  27. Pingback: cialis
  28. Pingback: buy naltrexone
  29. Pingback: cialis buy
  30. Pingback: viagra samples
  31. Pingback: careprost cost
  32. Pingback: cialis coupon
  33. Pingback: generic viagra
  34. Pingback: tadalafil
  35. Pingback: cialis
  36. Pingback: cheap 100mg viagra
  37. Pingback: viagra overnight
  38. Pingback: generic cialis
  39. Pingback: buy cialis
  40. Pingback: cheap propecia
  41. Pingback: viagra pills
  42. Pingback: best cbd oil
  43. Pingback: cbd oil benefits
  44. Pingback: cbd oil for sale
  45. Pingback: buy levitra online
  46. Pingback: prescription drugs
  47. Pingback: cheap cialis
  48. Pingback: cialis 20mg
  49. Pingback: Viagra 120mg usa
  50. Pingback: Cialis 80mg tablet
  51. Pingback: atarax 25mg cost
  52. Pingback: benicar 40mg cheap
  53. Pingback: casodex price
  54. Pingback: celebrex uk
  55. Pingback: celexa generic
  56. Pingback: cephalexin pills
  57. Pingback: free slots online
  58. Pingback: red dog casino
  59. Pingback: casino games
  60. Pingback: fast payday loans
  61. Pingback: buy cbd oil
  62. Pingback: cbd oil
  63. Pingback: buy essays papers
  64. Pingback: buy essay paper
  65. Pingback: cost of cleocin
  66. Pingback: clozaril tablets
  67. Pingback: combivent price
  68. Pingback: cialis online
  69. Pingback: order crestor 5mg
  70. Pingback: thesis to book
  71. Pingback: good thesis
  72. Pingback: ddavp tablets
  73. Pingback: differin australia
  74. Pingback: diltiazem usa
  75. Pingback: how to buy flomax
  76. Pingback: hyzaar 12,5mg usa
  77. Pingback: cialis price
  78. Pingback: online cialis
  79. Pingback: imitrex canada
  80. Pingback: special info
  81. Pingback: lamisil usa
  82. Pingback: lopressor generic
  83. Pingback: luvox pills
  84. Pingback: mestinon otc
  85. Pingback: cialis canada
  86. Pingback: micardis 20mg cost
  87. Pingback: mobic australia
  88. Pingback: cost of periactin
  89. Pingback: viagra
  90. Pingback: prevacid 30mg cost
  91. Pingback: prilosec nz
  92. Pingback: procardia cheap
  93. Pingback: proscar medication
  94. Pingback: cost of protonix
  95. Pingback: buy reglan
  96. Pingback: buy robaxin
  97. Pingback: rogaine uk
  98. Pingback: skelaxin purchase
  99. Pingback: cost of tenormin
  100. Pingback: dig this
  101. Pingback: zocor for sale
  102. Pingback: zyloprim tablets
  103. Pingback: zyprexa prices
  104. Pingback: zyvox generic
  105. Pingback: tadalafil nz
  106. Pingback: glimepiride cost
  107. Pingback: meclizine tablets
  108. Pingback: donepezil online
  109. Pingback: olmesartan cheap
  110. Pingback: celecoxib pills
  111. Pingback: citalopram cheap
  112. Pingback: online buy cialis
  113. Pingback: order clindamycin
  114. Pingback: warfarin 1mg cost
  115. Pingback: tolterodine price
  116. Pingback: fluconazole otc
  117. Pingback: cheapest bisacodyl
  118. Pingback: venlafaxine tablet
  119. Pingback: permethrin tablets
  120. Pingback: 141genericExare
  121. Pingback: 141generic2Exare
  122. Pingback: bvkrqghg
  123. Pingback: etodolac purchase
  124. Pingback: dadyrsaw
  125. Pingback: alendronate uk
  126. Pingback: je prend cialis
  127. Pingback: loperamide prices
  128. Pingback: comprar cialis
  129. Pingback: buy cialis
  130. Pingback: comprar viagra
  131. Pingback: mail order cialis
  132. Pingback: clomid over 40
  133. Pingback: metoclopramide uk
  134. Pingback: cap ampilox 500mg
  135. Pingback: nursing thesis
  136. Pingback: dissertation guide
  137. Pingback: deals on propecia
  138. Pingback: paper help
  139. Pingback: dgeneric cialis
  140. Pingback: ndma in metformin
  141. Pingback: gnereic cialis
  142. Pingback: free cialis online
  143. Pingback: chewable cialis
  144. Pingback: Dating online
  145. Pingback: cytotmeds.com
  146. Pingback: Google
  147. Pingback: regcialist.com
  148. Pingback: omeprazole 10 mg
  149. Pingback: discount viagra
  150. Pingback: get cialis
  151. Pingback: cialiselara
  152. Pingback: 1
  153. Pingback: eli lilly cialis
  154. Pingback: cheap viagra
  155. Pingback: ivermectin 3mg tab
  156. Pingback: is ivermectin
  157. Pingback: daily cialis

Comments are closed.