Let me outline how this balanced policy approach might work in practice. The Fed could sharpen its forward guidance by pledging to keep policy rates near zero until one of two events occurs. First, this policy would account for the liquidity trap risk by communicating that we intend to keep the federal funds rate at exceptionally low levels as long as the unemployment rate is above a 7 percent threshold. Reductions in the unemployment rate below this level would represent meaningful progress toward the natural rate of unemployment and might be a reason to lessen policy accommodation. Second, this policy would account for the risk of higher inflation – that is, we would be committed to pulling back on accommodation if inflation rises above a particular threshold. 1  4  Evans (2011). BIS central bankers’ speeches  I would argue that this policy’s inflation-safeguard threshold needs to be above our current 2 percent inflation objective. My preferred threshold is a forecast of 3 percent over the medium term. Now, calling for tolerance of inflation up to 3 percent may seem shocking coming from a conservative central banker. However, the most recent research shows that improved economic performance during a liquidity trap requires the central bank, if necessary, to allow inflation to run higher than its target over the medium term. Such policies can generate the above-trend growth necessary to reduce unemployment and return overall economic activity to its productive potential.
These CoCos can be converted into CET1 equity or written off in order to absorb losses in current operations. When accumulating the necessary bail-in instruments and high-trigger CoCos, banks have the opportunity to replace existing instruments with the required higher-quality instruments. The further strengthening of resilience through the accumulation of high-trigger CoCos, as foreseen by the regulations, is important and necessary. One reason for this is the big banks’ loss potential, which continues to be substantial relative to their capitalisation. Given their Page 1/3  Berne, 15 December 2016 Fritz Zurbrügg  News conference  significance to the Swiss economy, it is important that the big banks remain adequately capitalised, even in the event of such losses occurring. A second reason is the critical assessment by the markets as regards the resilience of banks, both in Switzerland and worldwide. By strengthening their resilience, banks can convince the markets of their soundness. The likelihood of share price collapses and sharply increased premia for credit default swaps, such as those observed at some banks this year, would thus be reduced. In addition to a strengthening of resilience, it is also essential that the big banks further improve their resolvability. This requires both sufficient holdings of bail-in instruments and the formulation of credible emergency and resolution plans. Emergency plans are aimed at ensuring that, in the event of imminent insolvency, functions that are important for Switzerland can be maintained.