Immediately upon reaching the zero bound, we provided additional stimulus by expanding our balance sheet and deploying forward guidance on the policy rate. These actions, in the context of a strong commitment to both our inflation and employment mandates, succeeded in preventing deflation expectations from taking hold, even though real outcomes were disappointing. We also took steps to formalize our 2 percent inflation objective.7 The Fed’s large-scale asset purchase programs differed from those originally undertaken in Japan both in theory and in practice. They were concentrated in longer-term securities – Treasuries and agency mortgage-backed securities. This reflected a different perspective on how purchases affect financial conditions and the economy, as well as the different structure of our financial system. Our view is that asset purchases work primarily through the asset side of the balance sheet by transferring duration risk from the private sector to the central bank’s balance sheet. This pushes down risk premia, and prompts private sector investors to move into riskier assets. As a result, financial market conditions ease, supporting wealth and aggregate demand. The fact that such purchases increase the amount of reserves in the banking system and the size of the monetary base is a byproduct – not the goal – of these actions. The U.S. also moved relatively quickly to recapitalize core financial institutions – partly as a result of good judgment, but also because the intense pressures of a capital markets-based financial system forced us to confront these issues.
Negative interest is intended to make it less attractive to hold large amounts of liquidity in Swiss francs. It is thus logical from a monetary policy perspective that banks which hold large quantities of Swiss franc liquidity relative to the size of their balance sheets should shoulder a heavier burden. As already mentioned, the introduction of negative interest rates on sight deposits at the SNB has also caused longer-term interest rates to fall. And yet, we have been living through a period of exceptionally low interest rates for around six years already, with even long-term investments bearing virtually no interest. The Swiss are a nation of savers and many people are concerned about low interest rates. I understand this, however we should not forget that what really counts for savers is not the nominal but the real (i.e. inflation-adjusted) interest rate. For some time now, inflation has been very low and now it is even negative. If inflation is negative, the real interest rate is higher than the nominal interest rate. As chart 5 shows, there have often been periods in the past when real interest rates were even lower than they are today. During this challenging phase for the Swiss economy, it is important that the negative interest rate be allowed to take effect and help to bring about a weakening of the Swiss franc. Efforts to circumvent negative interest rates by obtaining exemptions or shifting to cash are not in the interests of Switzerland as a whole in the current climate.