13  Remarkably, an excessively low repo rate was something that Dagens Nyheter’s editorial pages warned against in December 2009, when Lars Svensson entered a reservation against holding the repo rate at 0.25 per cent and advocated cutting it to zero and they commented on his “input to the Executive Board of the Riksbank being reminiscent of a captain slavishly following his nautical chart, even when the ship hits an iceberg. It was one thing to cut the repo rate in an acute situation during the crisis to ward off a depression. But now that the economy has begun to recover, a zero interest rate would only add fuel to the housing price fire.” (See Wolodarski, 2009). 14  Of course, some measures were taken earlier, but the introduction of the framework must nevertheless be regarded as an important condition for being able to conduct macroprudential policy systematically. BIS central bankers’ speeches  5  Unfortunately, I believe one must accept that this cannot be quantified in a very precise way. I can only note for my own part that if I had not found the developments in household debt and on the housing market problematic, I would have advocated a somewhat more expansionary policy – but definitely not that the repo rate should remain at 0.25 ever since the crisis. But it is difficult to be more precise than this.
[S]uch an approach was seen as likely to be relatively simple and efficient to administer, relatively straightforward to communicate, and effective in enabling interest rate control across a wide range of circumstances.”13 The second major issue facing the FOMC is whether to change its strategic framework to mitigate the risk of a return to the effective lower bound for interest rates. Once the federal funds rate is close to zero, the FOMC is constrained in its ability to lower short-term interest rates further, and the other available policy options to provide monetary policy stimulus may be less effective. If the FOMC were unable to provide sufficient stimulus, the economy could have difficulty recovering. In turn, inflation and inflation expectations could fall—and thus raise real interest rates—effectively tightening monetary policy and making the task of generating a sustainable recovery even more difficult. Some have argued that a desirable way to reduce this risk would be to raise the FOMC’s inflation objective from 2 percent to perhaps 3 or 4 percent. Their reasoning is that if the inflation objective were somewhat higher, nominal interest rates at the later stages of the business cycle would also tend to be higher, which would provide greater scope for the FOMC to cut short-term interest rates to stimulate the economy, if necessary. 4/7  BIS central bankers' speeches  While recognizing that there is a legitimate effective lower bound risk, I do not support the option of raising the inflation objective, for three reasons.