Helicopter money 'the next step' in monetary policy says Fed official Loretta Mester
A top official from the US Federal Reserve has said
"helicopter money" could be considered to stimulate America's economy if
conventional monetary policy fails.
Dr Loretta Mester, president
of the Federal Reserve Bank of Cleveland and a member of the
rate-setting Federal Open Market Committee (FOMC), signalled direct
payments to households and businesses to stoke spending was an option if
interest rate cuts and quantitative easing fail."We're always assessing tools that we could use," Dr Mester told the ABC's AM program.
"In the US we've done quantitative easing and I think that's proven to be useful.
So it's my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.Dr Mester's qualified support for the use of "helicopter money" - when stimulus is directly pumped into the real economy, not through the banking system - comes amid expectations that the Bank of Japan is poised to unleash a major fiscal stimulus package of at least 10 trillion yen ($130 billion) to kickstart its flat-lining economy.
Brexit a factor in steady US interest rates
The comments come as major central banks - including the US Federal Reserve, the European Central Bank and the Bank of Japan - consider unconventional policy tools in a world of slowing growth, low inflation and record low interest rates.Dr Mester said that concerns about the Brexit vote were a consideration in June when the Federal Reserve left rates at between 0.25 and 0.5 per cent.
While the immediate impact of Brexit rattled financial markets, Dr Mester said the Fed would be looking to medium and long term fallout.
"Between now and our next meeting and future meetings we are all going to be assessing what the impact of that decision will mean in terms of economic conditions and how they effect the medium term outlook for the US economy," she explained.
Low rates for too long will raise 'financial stability risks'
While Britain's shock decision to leave the European Union contributed to the Fed's decision to leave interest rates on hold last month, Dr Mester believes there are risks in keeping US interest rates too low for too long."For the US, if we overstay our welcome at zero then of course there would be financial stability risks," Dr Mester acknowledged.
"I don't think we're behind the curve in the US on interest rates, but it's something we have to assess going forward and where the risk balance is."
With the next FOMC rate setting meeting scheduled for July 28, Dr Mester declined to be drawn on whether there would be another US rate rise this year.
However, she signalled her support for moving rates higher and that rising employment and inflation meant "a gradual increasing pace in interest rates is appropriate."
"I've been one of the more positive members in terms of the US economy. I do think we've made significant progress on the employment part of our mandate and the recent inflation data has been encouraging," Dr Mester said.
I am still thinking that a gradual increase in interest rates over time is what's necessary."But of course the timing of the next and the ultimate slope of that gradual pace will depend on how the risks around the outlook evolve."
Dr Mester is visiting Australia on a speaking tour and spoke yesterday at a financial stability conference hosted by the University of Sydney Business School.
Follow Peter Ryan on Twitter @peter_f_ryan and on his Main Street blog.
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