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Repeats Story Initially Transmitted at 15:27 GMT Aug 29/11:27 EST Aug 29
By Jean Yung
WASHINGTON (MNI) - The risk of the U.S. central bank lowering interest
rates to near zero peaked last fall and will decline further in the future, a
development that supports a pick-up in interest rate increases, argues new
research from the Federal Reserve Board.
When the economy is expanding after a prolonged period of near-zero rates
-- "like the U.S. economy today" -- a higher effective lower bound risk "calls
for a more gradual increase in the policy rate," senior economist Taisuke Nakata
wrote in a recent FEDS Note posted on the Fed Board website.
But he found that the so-called zero lower bound risk, or the risk that the
Fed would have to slash rates to zero again in the next three years, has already
declined from a high of above 50% in the third quarter of 2016 to around 35% in
the second quarter of this year.
It is expected to fall further to around 26% by the end of the year as
policymakers get ready to raise rates further, Nakata found after running
stochastic simulations using the Fed's FRB/US model.
From their peak levels, "the current (effective lower bound) risk measures
are all more than halfway toward their steady-state values," estimated at
between 16% and 18%, he said.
"The extent to which central banks should adopt risk-management approach
depends importantly on how likely the federal funds rate will be constrained by
the ELB in the near- and medium-term future," he wrote. "The model-based
measures of ELB risk considered in this article can be a useful input in
evaluating the stance of monetary policy in the recent past and determining
policy rates in the future."
That would seem to support the conclusion that the decline in risk would
bolster the case for less gradual rate hikes.
The article does not address unconventional policy tools such as asset
purchases employed by various central banks including the Fed to stimulate the
economy when rates are close to zero.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org