What the Federal Reserve Could Do

The financial media is abuzz with speculation about what the Fed will do next, and whether it will decide to hike the federal funds rate target at its April Federal Open Market Committee (FOMC) meeting. There is a lot of speculation too as to what the Fed might do in the event of another recession or financial crisis. Some recent articles at the Brookings Institution delve into that possibility. And what is the first potential policy action discussed? Negative interest rates.
Ben Bernanke was the first to bring it up, with his first article in a series on ‘What Tools Does the Fed Have Left?’Although Bernanke mentioned that the Fed might return to quantitative easing also, he speculated that the Fed might even consider negative interest rates before more QE. Perhaps not surprisingly, Bernanke was more worried about whether the Fed has the legal authority to introduce negative interest rates than with the practicality of negative interest rates. His overall assessment is that ‘a policy of modestly negative interest rates might be a reasonable compromise between no action and rolling out the big QE gun.’
Brookings also held a conference last week to discuss some of the Fed’s possible policy options. Among those discussed were:
1. Negative interest rates – We’ve critiqued negative interest rates here and here. The only good thing about negative interest rates in the US is that they are still only under discussion. By the time they become a serious policy proposal, there will hopefully be enough negative feedback from Europe and Japan regarding negative interest rates there that it will scuttle any attempts to take them seriously as a policy tool in the US.

This post was published at Ludwig von Mises Institute on MARCH 31, 2016.