Central banks opened the tap for crisis fighting. Sometimes it worked

NEW YORK - The raft of programs rolled out by central banks to fight recent economic crises, from massive bond buying to negative interest rates, had mixed success at best and may do even less the next time around.

To be most effective, the group said, policymakers need to say clearly what they intend to do in the next downturn, and then act fast and aggressively when the time comes - precisely because their tools appear less effective the more economic conditions deteriorate. The study was written by a group of veteran monetary policy analysts including JP Morgan chief economist Michael Feroli, Citi chief economist Catherine Mann, and former Bank for International Settlements economist Stephen Cecchetti. It was released at an annual University of Chicago Booth School of Business forum on monetary policy.

Traditionally, raising and lowering short term interest rates was the mainstay tool of monetary policy, with higher rates curbing activity and lower rates encouraging borrowing and spending. Recent research has already suggested policymakers could get more bang for the buck from rate cuts if they moved faster and cut deeper.

“We should clarify in advance that we will deploy a broader set of tools proactively,” once rates hit zero, she said. “Our first high-level takeaway...is that the glass is half-full,” the group wrote, since in just under a third of 84 instances where “new monetary policies” were put in place, financial conditions eased significantly. “This is evidence of central bankers’ ability to affect financial conditions,” even after the main target interest rate is cut to zero and cannot be lowered further, the typical point at which less conventional methods are employed.

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