The central bankers of the post-crisis era are modern-day explorers, only with fan charts instead of sextants. As they like to say (repeatedly), they have been testing “uncharted waters” since the moment the U.S. Federal Reserve dropped its policy rate to zero in 2008. That represented the exhaustion of “conventional” monetary stimulus, yet the economy kept sinking. Central bankers mostly have been making it up as they go ever since.
The longer one stays at sea, the more comfortable one becomes with his or her surroundings. Same with the masters of monetary policy. They are becoming less afraid of the Great Unknown. On Dec. 7, the Bank of Canada endorsed negative interest rates as a viable emergency stimulus measure, a significant shift that demonstrates the extent to which monetary policy has evolved since the Great Recession. As official interest rates in various countries approached zero, there was talk that going negative—effectively requiring private lenders to pay to deposit their excess reserves at central banks. Theoretically, such a move could push more cash into the economy by punishing lenders for taking shelter. But those who mumbled the idea too loudly were seen as a touch mad. Canada’s central bank dismissed the possibility, stating explicitly that the target rate for overnight borrowing between Bay Street banks—the foundation of all private lending in the Canadian economy—had a floor of 0.25%. Anything lower risked screwing up financial markets, or so policy makers believed at the time.
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