SINGAPORE (Mar 17): The US government could turn towards “controversial policies” in its battle against economic damage from the Covid-19 outbreak, according to Steve Donzé, a senior macro strategist at Pictet Asset Management.
While some of these would have previously been dismissed as “impossible”, Donzé says the US could pull out all stops to “avoid a deflationary spiral”.
One such move is helicopter money – the direct transfer of money to consumers to induce spending.
Popularised by economist Milton Friedman in the late 1960s, this gives consumers more disposable income, while authorities pledge not to raise taxes.
Aside from this, Donzé is looking at a vigorous expansion of Quantitative Easing (QE) where the US Federal Reserve buys up to US$3 trillion ($4.3 trillion) of assets – a move equivalent to an interest rate cut of 200 basis points.
This would lift the US’ balance sheet to US$7 trillion, he estimates.
“Unlike previous QE programmes, though, we think the Fed’s buying spree will extend beyond US government and mortgage securities,” Donzé muses, adding it could possibly venture into corporate bonds and equities if Congress changes the Fed’s mandate.
Alternatively, he says the central bank may consider a Japanese-style Yield Curve Control where it buys an unlimited volume of Treasuries to keep the 10-year yield from rising above 1%.
Under this, the Fed can extend its monetary stimulus without growing its balance sheet, says Donzé.
Finally, he notes the Fed can take its benchmark cost of borrowing below zero.
This, he explains, will substantially reduce any recessionary impact and slack on an economy as seen in the 2007 to 2009 crisis when the effective lower bound for the fed funds rate was lowered to 0.75%.
After all, as Vasco Curdia, a senior economist at the Federal Reserve Bank of San Francisco, puts it, “negative interest rates may be a useful tool to promote the Fed’s dual mandate” of maximum employment, stable prices and moderate long term interest rates.
