The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, said the former Federal Reserve (Fed) Chair Ben Bernanke about the new tools of monetary policy in an address to the American Economics Association on Saturday.
Key Quotes (via Reuters):
Bond buying should be made a permanent part of the US central bank’s toolkit.
Similarly, “forward guidance,” or promises about future policy, proved effective particularly as those pledges became more specific and tied to particular goals like reaching a certain level of unemployment.
Forward guidance in the next downturn will be more effective – better understood, better anticipated, and more credible – if it is part of a policy framework clearly articulated in advance.
Both QE and forward guidance should be part of the standard toolkit going forward.
The room available for conventional rate cuts is much smaller than in the past but the new policy tools are effective.
The Fed should prepare for the next recession – including a recommendation that the Fed maintain “constructive ambiguity” about the possibility of using negative interest rates, and not rule out a tool it might find useful under some conditions.
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