MNI INTERVIEW: Ex-Fed's Poole: Cut Rates To Ensure Stability

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve should lower its policy rate close

to zero to maintain orderly money markets and a safe banking system with

Covid-19 and an oil price war roiling markets, former St. Louis Fed President

Bill Poole told MNI. 

     "The Fed should follow the market down so that it is not pulling reserves

out of the system to maintain a fed funds rate above the market," Poole said on

Monday. 

     Fed Chair Jay Powell should also explain that the move "does not have

anything to do with traditional stimulus" and that the Fed would be prepared to

raise rates once the scare is over, Poole said. 

     "We have a massive flight to safe assets, and it would be a mistake for the

Fed to remove safe assets from the market," Poole said. 

     The central bank could use as its reference the 13-week Treasury yield,

currently at 0.3281%, Poole said. 

     "Maybe it doesn't lower rates all the way to zero, but it should explain

the rationale. If we do not follow the market down then we're going to be forced

to pull funds out of the market to maintain our target and that makes no sense,"

Poole said. 

     "By the same token, as the economy and individuals adjust to this new

environment and markets start to return to normal, we have to be prepared to

increase rates, perhaps back to where we are now, perhaps higher," he said.

     The move would be unprecedented in Fed history, Poole said, but the virus

scare is similarly unique. 

     "Powell should reiterate the Fed can't invent a vaccine, but it can provide

conditions that are as orderly and predictable as possible so the private market

can handle the disturbance as efficiently as possible," Poole said. 

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

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