The manipulation is in the open now, and it''s faltering

Fed considered emergency measures to save economy

By Peronet Despeignes
Financial Times
March 24, 2002
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WASHINGTON -- The U.S. Federal Reserve in January
considered a variety of quot;unconventionalquot; emergency
measures to be taken if cutting short-term interest rates
failed to arrest a U.S. recession and prevent
Japanese-style deflation. One of those steps may have
been a plan to buy U.S. stocks.

According to minutes of its January 25-26 meeting, the
Fed's policy-making Open Market Committee agreed
quot;unconventional policy measures might be availablequot;
to deal with a situation in which quot;the economy were to
deteriorate substantially in a period when nominal
short-term interest rates were already at very low
levels,quot; although, it said, the efficacy of such measures
was quot;uncertain.quot; The minutes vaguely mention internal
analyses of such a scenario.

The discussion appeared largely academic, conducted
at a time when the year-long recession was drawing to
a close. But the topic was apparently brought up in the
context of concerns that the United States could have
faced -- and might face in the future -- a dilemma in which
short-term interest rates were so low as to be rendered
ineffective as a monetary policy tool.

Minutes which summarised the meeting were released
last week. A full transcript will not be available for five
years but a senior Fed official who attended the meeting
said the reference to quot;unconventional meansquot; was
quot;commonly understood by academics.quot;

The official, who asked not to be named, would not
elaborate but mentioned quot;buying U.S. equitiesquot; as an
example of such possible measures, and later said the
Fed quot;could theoretically buy anything to pump money
into the system,quot; including quot;state and local debt, real
estate, and gold mines -- any asset.quot;

The Fed currently relies on the buying and selling of
Treasury bonds as a way of targeting short-term interest
rates.

In its fight against the economic downturn, the Fed has
reduced the Fed funds rate from a 10-year high of 6.5
percent to a 40-year low of 1.75 percent. The moves
prompted speculation last year among some
economists that short-term interest rates might at some
point hit zero and that interest-rate policy might become
useless.

The minutes said FOMC members agreed this scenario
was quot;highly remote, but could not be dismissed altogether.quot;

While not mentioned in the minutes, Fed officials
appeared to have in mind the example of Japan, an
economy mired in a decade-long slump. Deflation -- or
falling prices -- and other problems have led the central
bank to cut short-term interest rates to practically zero.

The minutes said Fed officials considered a similar
U.S. scenario and concluded: quot;If in the future such
circumstances appeared to be in the process of
materialising [in the United States], a case could be
made at that point for taking pre-emptive easing
actions, to help guard against the potential development
of economic weakness and price declines that could be
associated with the so-called 'zero bound' policy
constraint.quot;

This quot;zero boundquot; scenario -- in which the Fed funds
rate would hit zero -- has been discussed before by
policymakers as the Fed has succeeded in driving
inflation to 30-year lows. But talk of quot;unconventional
policy measuresquot; has never appeared in FOMC
minutes.