U.S. Federal Reserve Chairman Ben BernankeJIM YOUNG
Among steps the Fed could undertake are the following.
BUY MORE ASSETS
The Fed could buy more mortgage-backed securities, or since its holdings of MBS are already so large, it could buy more long-term Treasury securities.
St. Louis Fed President James Bullard said in Arkansas this month that the Fed might need to ramp up its purchases of U.S. Treasury debt if price levels keep softening and raise the threat of deflation.
Buying Treasuries could raise questions about whether the Fed is simply printing money to finance the massive U.S. budget deficit and debt, which could undermine confidence in the dollar and drive interest rates higher.
DEEPEN ITS COMMITMENT TO HOLD RATES LOW FOR A LONG TIME
Since March, 2009, the Fed has said it anticipates that economic conditions are likely to warrant "exceptionally low" borrowing costs for "an extended period." It has specified that those conditions include high unemployment, subdued inflation trends and stable inflation expectations.
The Fed could rephrase that promise to provide additional guarantees to markets of rock-bottom rates even when the recovery begins to take off.
However, Bernanke might find it hard to garner support for such a move. A number of Fed officials have expressed concern that the low-rate pledge could hinder the central bank from acting quickly if needed.
STOP PAYING INTEREST ON EXCESS RESERVES
The Fed could try to spark more lending by cutting the interest rate it pays banks on reserves they hold at the central bank from the current 0.25 per cent. This would only be effective if there was unsated loan demand, which some doubt.
OPEN A NEW LENDING FACILITY
The Fed could open or keep open a lending facility to increase credit availability for any sector of the economy it wants to help, such as commercial real estate.
The Fed would have to argue that crisis conditions exist in order to lend to non-banks, and may be shy about doing so after similar actions were criticized during the 2007-2009 financial crisis.
Reuters