MNI INTERVIEW: Ex-Fed's English Sees Potential Negative Rates

By Evan Ryser

     WASHINGTON (MNI) - With limited policy space, the Federal Reserve is

increasingly likely to take up unconventional policies including negative rates

if faced with a downturn, a former senior adviser to the Fed Board said in an

interview.

     "Having now seen the Europeans and the Japanese take rates negative, I

think the Committee might be more willing than in the past to move rates

negative," William English, a former Fed Board senior special advisor and

current professor at the Yale School of Management said.

     "I don't think it would be very far negative. There is a fair amount of

evidence that if you go far negative then you impose costs on banks and other

intermediaries that may make the reductions counterproductive in terms of their

macroeconomic effect," English said.

     The Fed announced last year that it was conducting a broad review of the

strategy, tools, and communications it uses to pursue its dual mandate. Fed

officials have noted significant structural changes to the U.S. economy since

the Global Financial Crisis, including a drop in the real neutral interest rate

by 200 to 300 bps, putting pressure on their toolbox.

     A downturn would prompt discussions about negative rates just as it did in

the aftermath of the Global Financial Crisis, English said.

     "[The Fed] might again say we don't need to try negative rates, an untested

tool that might have some adverse effects. We will just go with what are now, in

some sense, conventional unconventional tools, QE and forward guidance, and

provide accommodation that way," English said. "So there'd be a real decision to

make, but I wouldn't be surprised if they decided to go with some modestly

negative rates."

     -- YIELD CURVE CONTROL

     English also endorsed studying the use of yield curve control, a technique

which former Fed chairs Ben Bernanke and Janet Yellen have both suggested could

be added to the Fed's arsenal.

     Whereas quantitative easing focuses on quantities of bonds, yield curve

control takes aim at their price, with the central bank buying however many

necessary in order to ensure rates don't surpass its target. Whereas the Bank of

Japan's policy has included targeting the 10-year JGB, the Fed would likely

focus on the near end of the yield curve and move out to one- or two-year rates.

     Fed Vice Chair Richard Clarida said in February the Fed "will consider"

yield curve control and Governor Lael Brainard in May said she would like to

"hear more."

     "I do think that's an interesting possible policy tool," English said. "I

definitely could see the Committee at some point deciding that that was a useful

tool to pull out of the toolkit."

     "It goes together with forward guidance in a way that could make it helpful

in communicating policy intentions."

     -- HELICOPTER MONEY

     In the case of a major shock, at a time when monetary policy is fully

extended and fiscal authorities are constrained by high levels of debt, then,

English said he it may sense to take the more radical step of providing

so-called helicopter money.

     A "money finance fiscal program" would put money directly into the hands of

public and private sector spenders and be financed by money creation, not debt

issuance.

     "The central bank would say they're going to generate seigniorage that will

be sufficient to cover a contemplated fiscal policy action, and in effect what

that means is that the central bank will keep monetary policy easier for

longer," English said. "That means that the debt-to-GDP ratio doesn't go up

because the seigniorage pays for the fiscal action."

     "If you're in extremis, I think this is something that that you might want

to seriously consider," English said.

     Bernanke has written that "helicopter money could prove a valuable tool."

In addition, three former central bankers - former Fed governor Stanley Fischer,

ex-Swiss central bank chief Philipp Hildebrand, and ex-deputy governor of the

Bank of Canada Jean Boivin - made the case in August for the creation of a

permanent standing emergency fiscal facility.

     The Fed would need legal authority from Congress for such a facility and

for the ability to buy Treasuries directly from the Treasury Department, which

is currently explicitly forbidden.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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