Japanese-style interest rate caps are drawing interest from global central bankers worried about a downturn, including US Federal Reserve officials grappling with how to bolster their options as prospects for the global economy darken.
A departure from the classic focus by central banks on short-term rates, the Bank of Japan’s “yield curve control” initiative aims to anchor longer-term rates that often more directly influence consumer borrowing costs and spending.
The BOJ has been receiving queries from several central banks, including the Fed, on how the unconventional program works, sources familiar with the matter said.
Several top Fed officials have discussed the notion in recent months as the US central bank reviews how it conducts policy, including governors Lael Brainard and Richard Clarida. Brainard said she “would like to hear more about it” even as she is far from embracing it as an option.
The interest speaks to the dilemma faced by the world’s big three central banks - the Fed, BOJ and European Central Bank. The Fed alone among them has been able to raise interest rates reasonably away from zero since the 2007-2009 financial crisis, but even it is about to begin lowering them in response to global weakness and persistently low inflation.
Globally there is a recognition that if the major economies have all gravitated together toward a weak-inflation, low-growth, and low-interest-rate world, textbook central banking may be dead - with no clear substitute at the ready.
“I am open minded about a whole slew of policy alternatives,” Chicago Federal Reserve Bank President Charles Evans said. “What’s most critical is that whatever we do we are able to demonstrate that with that tool we are out to achieve our mandate and that tool is set properly.”
The Fed, BOJ and ECB all dived headlong into unconventional policy to combat the crisis. Each bought trillions of dollars in financial assets to flood their economies with cash in programs called quantitative easing, an effort seen likely to be repeated in the future even as its effectiveness is debatable.
The BOJ, though, has pushed the bounds of convention further than the others. Three years ago, with short-term rates already pushed into negative territory to little effect, it launched a bold experiment to anchor long-term interest rates near zero in a bid to breathe life into an anemic consumer spending scene.
Under yield curve control, the bank targets a rate at a specific maturity. It buys whatever quantity of securities is needed to hit that, a goal easy to communicate to the public and easy for businesses and households to plan around.
The Fed’s Brainard discussed the concept at a Fed event in May.
“Once the short-term interest rates we traditionally target have hit zero,” she said, “we might turn to targeting slightly longer-term interest rates - initially one-year interest rates, for example, and if more stimulus is needed, perhaps moving out the curve to two-year rates.”
In Japan it has had some success, albeit mixed.