Fed Toolkit Effectiveness Came Under Scrutiny at FOMC Meeting (Bloomberg)

Fed Toolkit Effectiveness Came Under Scrutiny at FOMC Meeting (Bloomberg)

Bloomberg Aug 23, 2018

Federal Open Market Committee discussed the central bank’s policy toolkit and the issue of the effective lower bound at its July 31-Aug. 1 policy meeting, according to minutes of gathering released Wednesday.

Participants generally agreed current toolkit could provide significant accommodation, but expressed concern about the potential limits on policy effectiveness stemming from the effective lower bound

Saw it as “matter of prudent planning” to evaluate potential policy options before ELB events

Participants saw monetary policy as having less scope than in the past to cut fed funds in response to negative shocks

Periods at ELB “could become more frequent and protracted than in the past”

Fiscal policy seen as a potentially important tool in addressing a future economic downturn in which monetary policy was constrained by ELB

Counter-cyclical fiscal policy actions in U.S. may be constrained by rising federal government debt

A couple of participants saw macro-prudential and regulatory policies as tools that could be used to mitigate risk

Participants generally agreed that both forward guidance and balance-sheet actions would be effective tools to use if ELB constrained fed funds

Participants acknowledged may be limits to effectiveness of its tools in addressing an ELB episode

While current toolkit was judged to be effective, participants agreed, as a matter of prudent planning, to discuss their policy options further and to broaden the discussion to include the evaluation of potential alternative policy strategies for addressing the ELB

Participants suggested a number of possible alternatives might be worth consideration and agreed to return to this topic at future meetings


(Source: Bloomberg)