Federal Reserve

Bernanke: Monetary policy 'reaching its limits'

Yellen: Negative rates not part of active discussion
Yellen: Negative rates not part of active discussion

Monetary policy in the United States and other developed countries "is reaching its limits," but the Federal Reserve has not yet run out of responses to a potential slowdown, former Fed Chairman wrote Friday.

In a blog post for the Brookings Institution, he argued a "balanced monetary-fiscal response" would better boost the economy than monetary tools alone. Bernanke assessed policy options for the Fed, saying negative interest rates hold "modest benefits" but are unlikely.

"I assess the probability that this tool will be used in the U.S. as quite low for the foreseeable future. Nevertheless, it would probably be worthwhile for the Fed to conduct further analysis of this option," Bernanke wrote.

Ben Bernanke
Katie Kramer | CNBC

The U.S. central bank this week held its target short-term interest rate range at 0.25 percent to 0.5 percent. The Fed indicated it could hike twice this year, but as rates remain below historical averages, many market watchers have wondered what the Fed could do to respond to another potential slowdown.

Bernanke said the Fed could use forward guidance, or "talking down" longer-term rates while convincing markets that short-term rates will remain low. If economic weakness warranted a stronger response, the Fed may consider quantitative easing.

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But more bond-buying could spook markets and may not prove as effective as when it was used after the financial crisis, Bernanke argued. The Fed may then mull following central banks in Europe and Japan to negative interest rates.

On Wednesday, Fed Chair Janet Yellen said the central bank had not "actively" discussed the policy move.

"What I would like to make clear is that this is not actively a subject that we are considering or discussing. The committee continues to feel that we are on a course where the economy is improving and inflation is moving back up," Yellen said.

Bernanke said market aversion to negative rates seems "overdone." He noted that the policy would bring only "modest benefits" with "manageable costs."