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Federal Reserve Governor Lael Brainard on Friday said she favored a very aggressive policy approach to the next recession that would include capping interest rates beyond short-term rates, a policy known as yield curve control.
In a speech at a conference examining how the Fed should react in the next downturn, Brainard said the Fed should also pledge to keep interest rates at zero until the Fed achieves its targets of full employment and a 2% annual inflation rate.
This could leave rates near zero for a long time. The Fed has yet to hit its 2% inflation target a decade after the 2008 financial crisis. And many economist don’t think full employment has been reached either.
“The lessons from the crisis would argue for an approach that commits to maintain policy at the lower bound until full employment and target inflation are achieved,” Brainard said.
In addition, Brainard said the Fed would control the yield curve until it achieved its goals.
“This forward guidance could be reinforced by interest rate caps on short-term Treasury securities over the same horizon,” the Fed governor said.
The Fed did not attempt yield-curve control during the 2008 financial crisis. Instead, officials used quantitative easing, or QE, which was the purchase of government securities to drive down interest rates.
Under the yield curve control policy, the Fed would target some longer-term yield and tell the market that it would buy bonds to keep the yield from rising above target.
In theory, the central bank might not have to buy many bonds if the market believed the pledge was credible.
A paper released by prominent economists at the conference Friday argued for just such an aggressive approach using these new tools.
Read: All-star economists urge Fed to be aggressive to combat next recession
Two Fed officials said Friday they are not worried about a recession in the near term, although the coronavirus is a risk to the outlook.
Atlanta Fed President Raphael Bostic said the economy was showing steady, strong, growth.
“The economy is strong. It can stand on its own feet and it can grow pretty consistently. And so we should let it do that,” he said, in an interview on CNBC. He said the COVID-19 outbreak would likely result in a “short-time hit” for the economy.
St. Louis Fed President James Bullard also said on CNBC that the coronavirus impact on economic growth would be temporary.
Investors are more worried about the epidemic emanating from China that is impacting international trade and travel. Stocks DJIA, -0.61% were down sharply on Friday as worries about the coronavirus intensified.
