Factbox: Fed explores unorthodox tools to support economy

(BestGrowthStock) – The Federal Reserve, which is widely expected to embark on a renewed program of monetary easing in November, is exploring an array of unconventional approaches to help a struggling U.S. economy.

A string of Fed speeches on Tuesday and minutes to the Fed’s September policy meeting published last week indicated that, beyond a likely increase in Treasury purchases, the Fed is discussing even more radical options.

Here are some of the tools the Fed is considering as possible future steps to support a flagging economy characterized by low inflation and high unemployment.

TREASURY PURCHASES

The Fed looks set to launch a new program to purchase U.S. Treasury bonds at its upcoming meeting on November 2-3. The scope and pace of such purchases remains unclear, and will be the major focus for markets ahead of the Fed’s November decision. Atlanta Federal Reserve Bank President Dennis Lockhart suggested on October 15 that purchases on the order of $100 billion a month might be appropriate.

The Fed has already bought about $1.7 trillion in securities, of which $300 billion were Treasuries and the rest mortgage-linked debt. The Fed appears to have backed off the idea of further purchasing of housing bonds, where it already has an overwhelming presence.

Advocates of further Treasury purchases believe a greater effort is needed to boost business and consumer demand. Skeptics argue the policy carries more risks than potential benefits, and could undermine the Fed’s hard-earned credibility as a steward of low inflation.

INFLATION TARGET

The U.S. central bank may choose to set an explicit inflation target in conjunction with a policy of asset purchases. The goal would be to clearly communicate to both the public and financial markets that policymakers are committed to getting inflation back up to more comfortable levels.

This could help foster expectations of higher inflation, which could have a stimulative impact since it would push inflation-adjusted interest rates lower.

The Fed already has a longer-run inflation forecast of 1.7 to 2 percent, which acts as an implicit target. Fed Chairman Ben Bernanke underscored the objective on Friday when he said the Fed would like to see inflation running at about 2 percent or a bit lower.

LOW RATES LANGUAGE

The Fed has said it could offer further stimulus to the economy by bolstering its commitment to keeping interest rates low for an extended period. This would force market participants to price in lower long-term borrowing costs, and prompt some investors to buy riskier assets as they seek higher returns. Bernanke specifically highlighted this possibility in his speech last week.

PRICE LEVEL, GDP TARGETING

Fed minutes published last week showed policymakers were willing to consider other fairly unorthodox policy approaches, but their relative novelty leaves a pretty high threshold for implementation.

Price-level targeting takes inflation targeting one step further. By targeting a specific price level, the Fed would promise to generate above-target inflation at times when inflation is slowing or prices falling in order to play catch-up. Like an inflation target, a price-level target could help lift inflation expectations.

The presidents of the Chicago, New York and Minneapolis Federal Reserve banks have publicly expressed sympathy for the idea. However, in August Fed Chairman Ben Bernanke said it would not make sense at a time inflation expectations were already well anchored.

Gross domestic product targeting would constitute an even bolder challenge, since there are many factors outside the central bank’s control affecting the path of economic growth.

Both approaches are seen as being potentially difficult to communicate and even harder to implement.

SHOOT FOR EVEN HIGHER INFLATION

Staff at the International Monetary Fund and a number of other prominent economists have argued the Fed should consider shooting for inflation above 2 percent as a way to raise price expectations and induce consumers and businesses to go out and spend. This approach is seen as problematic within the Fed. Policymakers worry that, once the inflation genie is out of the bottle it may be hard to get it back under control.

Factbox: Fed explores unorthodox tools to support economy