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Prevent the next deflation – What’s left for the Fed?

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.

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