Fed policies effective even with rates at zero: Study

SAN FRANCISCO: The US Federal Reserve has been able conduct effective monetary policy even though its main policy lever, a target for short-term rates, has been jammed at zero since late 2008, research published by the San Francisco Fed on Monday showed.

With short-term interest rates pinned down, some economists have worried that the Fed has less ability than usual to influence long-term borrowing costs, a key channel for adding juice to the economic engine.

Eric Swanson, a senior research advisor at the regional Fed bank, analyzed yields on US Treasuries to test that assumption.

He found that the Fed's forward guidance - giving markets information about where the Fed expects short-term rates to be in the future - and the Fed's bond-buying programs on several occasions helped push down long-term borrowing costs by as much as 0.2 percentage point.

That's about what the Fed could have achieved by cutting its short-term interest-rate target by 0.75 percentage point to 1 percentage point, he wrote - a large cut by historical standards.

"To the extent that the Fed can affect these longer-term interest rates through forward guidance and large-scale purchases of longer-term bonds, the zero lower bound appears not to have constrained monetary policy as much as is sometimes believed," Swanson wrote in the regional Fed bank's latest Economic Letter.