Yield-curve control could prove a useful tool in the next recession

MANY HAZARDS complicate the job of Jerome Powell, the chairman of the Federal Reserve, from meddling presidents to pandemics. At the press conference following the Fed’s monetary-policy meeting on January 29th, he was grilled on its likely response to all of these. But Mr Powell’s biggest problem is a more enduring and global one: interest rates are stubbornly low. In recent months, members of the Fed’s Board of Governors have spoken about the need to prepare for future downturns. The Fed’s main policy rate will almost certainly be cut to zero, forcing it to rely once more on its “unconventional” tools. Mr Powell has said he is open to considering yield-curve control, a new approach borrowed from Japan. It is a promising innovation, but also a timid one, given the challenges the next recession will probably bring.

During the global financial crisis the hope was that when recovery arrived overnight interest rates—central banks’ preferred policy lever—would rise, restoring business as usual. In fact, despite a resilient global expansion, few rich-world countries have left zero behind. America, the most obvious exception, discovered last year that it could not sustain an overnight rate above 2%, even with low unemployment and a government-budget deficit approaching 5% of GDP. Some economists reckon low rates are only a minor inconvenience. In a recent lecture Ben Bernanke, a former Fed chairman, argued that the unconventional tools used during and after the crisis worked reliably and effectively, and could do so again. Others would prefer to have more powerful, and comprehensible, monetary policy ready for the next downturn.