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The Swiss still have plenty of ammo

Summary:
During the Great Recession, the Fed’s target interest rate never fell below 0.25%. The various QE programs pushed the monetary base up to a peak of just over 20% of GDP. In contrast, the Swiss have reduced their target interest rate to negative 0.75%, and their monetary base has been increased to roughly 100% of GDP. So you might wonder if the Swiss are out of ammo. Far from it: The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick.In the interview, Jordan affirmed the ongoing need for a deposit rate of minus 0.75 percent plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued. . . . “We always have the possibility of lowering rates further. We have already

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During the Great Recession, the Fed’s target interest rate never fell below 0.25%. The various QE programs pushed the monetary base up to a peak of just over 20% of GDP.

In contrast, the Swiss have reduced their target interest rate to negative 0.75%, and their monetary base has been increased to roughly 100% of GDP. So you might wonder if the Swiss are out of ammo. Far from it:

The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick.

In the interview, Jordan affirmed the ongoing need for a deposit rate of minus 0.75 percent plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued..

“We always have the possibility of lowering rates further. We have already gone quite far, but still we’ve got the necessary room to maneuver,” he was quoted as saying in comments published in Saturday’s Blick. “And we can, if necessary, expand the balance sheet further via interventions.”

While the Swiss economy is currently doing pretty well, it’s nice to know that they have the necessary ammo for more stimulus, if needed. Indeed their willingness to employ this ammo is one of the reasons why the Swiss economy is doing OK.

If only the Fed had been willing to be more aggressive during the Great Recession. In that case there might have been only a mild recession, and no need for them to actually be so aggressive.

Another country with plenty of ammo is Argentina, where inflation is running at 50%. The Economist describes the problem this way:

Argentina’s macroeconomic policies are now consistent with lower inflation: the fiscal deficit is narrowing, interest rates are painfully high and the imf has boosted the central bank’s foreign-exchange reserves. But inflation has its own momentum: it is high, because it was high, and is expected to remain so.

That final sentence kind of makes my skin crawl. I get that rising inflation expectations can boost velocity, but let’s get serious. There’s no mystery here; there are actual concrete steps that lead to high inflation:

The Swiss still have plenty of ammo

I guess Argentina doesn’t have a low birth rate like Japan. You know, the “demographics” that supposedly cause “lowflation”.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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