From Bernanke’s speech in 2003:
Should the funds rate approach zero, the question will arise again about so called nontraditional monetary policy measures. I first discussed some of these measures in a speech last November. Thanks in part to a great deal of fine work by the staff, my understanding of these measures and my confidence in their success have been greatly enhanced since I gave that speech.
Without going into great detail, I see the first stages of a “nontraditional” campaign as focused on lowering longer-term interest rates.
The two principal components of that campaign would be a commitment by the FOMC to keep short-term yields at a very low level for an extended period together with a set of concrete measures to give weight to that commitment.
Such measures might include, among others, increased purchases of longer-term government bonds by the Fed, an announced program of oversupplying bank reserves, term lending through the discount window at very low rates, and the issuance of options to borrow from the Fed at low rates. I am sure that the FOMC will release more specific information if and when the need for such approaches appears to be closer on the horizon.
Does America face Japanese-style deflation?
When discussing the issue, most people focus on GDP growth. Yes, in terms of GDP growth, in the past decade, the US still managed to grow 18%, cumulatively – that’s roughly 1.8 percent per year on average. However, in terms of employment growth, it has been a lost decade for the US (see the chart below).
(click to enlarge)
Given the economic dynamism in the US, and compare it to Japan, I have long thought the Lost Decade would never happen in America, a land full of opportunities.
I guess I need to re-visit my presumptions — Whether a big housing bubble (in the US’ case, two big bubbles in one decade) always foretells anemic economic growth afterward, as opposed to the common belief that Japan’s lost decade was largely due to policy mistakes. Maybe, in the aftermath of a big bubble, America and Japan are really not that much different – an open question.