As, Federal Reserve Chair Janet Yellen was highly predictable in her remarks Friday in Jackson Hole, Wyoming. The job market is improving. The broader economic outlook remains uncertain. The central bank plans to raise interest rates maybe someday. The sun sets in the west.
But buried deep in the speech, scrutinized as usual by investors for any hint of where monetary policy might be headed, was an incredible side note: Yellen wondered aloud whether purchasing a wider range of assets -- as the Bank of Japan is doing with equities or the European Central Bank with corporate bonds -- is something the Fed might need to consider in the future. Currently, such purchases are against the Fed’s charter; such a move would require a change in the law, as she acknowledged.
Why incredible? For one, the Fed hoovering up financial assets amounts to quasi-state ownership of private enterprises. But even more noteworthy is that Yellen, while issuing the usual blandishments about how the economy is improving, almost casually lets slip that the Fed may need to find new ways for mainlining money into the financial system. Houston, we have a problem.
The context for this is that with nearly 30 percent of global government bonds around the world trading with negative interest rates, central bankers are grappling with a world where more monetary policy stimulus is needed. Trouble is, the tools used to deliver that that stimulus are no longer as effective as they once were.
Cutting interest rates into negative territory, as central banks have done in Europe and Asia, carries risks such as encouraging cash hording. And further purchases of government debt risks draining capital markets of trading volumes, reducing the availability of “risk-free” collateral banks need to make loans to each other, while likely having limited impact on economic growth.
Yellen’s comments echo recent sentiments expressed by her Fed colleagues that monetary policy may need to remain highly accommodative for -- well, no one really knows -- because of structural economic problems, such as a persistent slowdown in labor productivity.
That harsh dose of reality seems to have largely escaped attention, judging from much of the commentary on Yellen’s speech that saw her as signaling that the time for interest rate hikes are nearly here.
The upshot: The U.S. economy has lost its verve and may need the Fed’s medicine for longer. Open wide.