It’s starting to feel like October 2011, when there was a wave of high profile endorsements of NGDPLT. Several Fed officials have recently spoken favorably of NGDP targeting, Bloomberg.com just endorsed it, and now Michael Woodford has done so as well. He’s probably the world’s leading macroeconomist.
Hours later Saturos sent me a link from the WSJ:
JACKSON HOLE, Wyo.–A key Federal Reserve official said Friday he sees potential value in charging banks to park reserves on the central bank’s balance sheet.
In an interview with Dow Jones Newswires on the sidelines of the Federal Reserve Bank of Kansas City’s research conference in Jackson Hole, Wyo., St. Louis Fed President James Bullard says he sees potential benefit from imposing negative interest rates on the excess reserves banks currently park at the Fed.
Banks are now currently paid 25 basis points to keep money at the Fed. Even at such a negligible level, banks have parked massive amounts of cash at the central bank that could be put to work in the economy.
“I’m becoming more sympathetic” to the idea a new avenue of monetary policy stimulus could involve the Fed moving into “negative territory,” Mr. Bullard said. From the current level, “you could go to minus 25 or minus 50 (basis points). That gives it more punch” than simply cutting the level to zero, he said.
If negative rates were put in place, “it would definitely change the calculus for the banks,” Mr. Bullard said. The official noted “support has waxed and waned” inside the Fed for this action, but “now that other countries have tried negative rates, I think we could do that as well.”
Wow, where are Fed people suddenly getting all these great ideas? Maybe from that 2009 New York Fed report that discussed the option of negative IOR. And guess who they cited as first publishing an article discussing the idea. Also note that Woodford mentioned David Beckworth, so we know he’s familiar with market monetarism.
To get serious for a moment, Bullard doesn’t even have a vote on the issue, as it’s a Board decision. There’s debate about whether the Fed has the authority, but they showed in 2008 that they can get really creative. I’m told that the new FDIC fee plan is already a tax on ERs (someone should double-check), so lowering IOR to zero would effectively create a negative IOR. Also, does anyone know if the FDIC fee applies to that part of reserves that are vault cash?
I’d still vastly prefer a higher NGDP target over negative IOR.