Helicopter Money "The Next Step" In US Monetary Policy

Think "helicopter money" is/will be confined only to Japan, which has been sending conflicting trial balloons about this unprecedented next step in monetary policy for the past two days (first Japan's Senkei reported that the government will be adopting “helicopter money” followed by a government spokesman denying the report, then followed by a separate Bloomberg report about a 10T yen stimulus plan, the concluding with Abe advisor Koici Hamada saying that "boosting fiscal and monetary stimulus at the same time would be effective" in Japan)? Think again.

Speaking overnight in Australia, the Fed's Loretta Mester said "helicopter money" could be considered to stimulate America's economy if conventional monetary policy fails.

As Australia's ABC reports, Mester, president of the Federal Reserve Bank of Cleveland and a member of the rate-setting Federal Open Market Committee (FOMC), signalled direct payments to households and businesses to stoke spending was an option if interest rate cuts and quantitative easing fail.

"We're always assessing tools that we could use," Mester told the ABC's AM program. "In the US we've done quantitative easing and I think that's proven to be useful.

"So it's my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.

Mester's qualified support for the use of "helicopter money" comes amid expectations that the Bank of Japan is poised to unleash a major fiscal stimulus package of at least 10 trillion yen ($130 billion) to kickstart its flat-lining economy.

The surprising comments from a Fed hawk, come on the heels of two other Fed presidents hinting that more QE could be used as additional "ammo" should the US economy relapse back into recession, and as major central banks consider unconventional policy tools in a world of slowing growth, low inflation and record low interest rates. Mester said that concerns about the Brexit vote were a consideration in June when the Federal Reserve left rates at between 0.25 and 0.5 per cent, a consideration While the immediate impact of Brexit rattled financial markets, Mester said the Fed would be looking to medium and long term fallout.

"Between now and our next meeting and future meetings we are all going to be assessing what the impact of that decision will mean in terms of economic conditions and how they effect the medium term outlook for the US economy," she explained.

Ironically, the same Mester said she believes there are risks in keeping US interest rates too low for too long. "For the US, if we overstay our welcome at zero then of course there would be financial stability risks," Dr Mester acknowledged. So her "solution" is not just more easing, but outright monetary paradrops.

"I don't think we're behind the curve in the US on interest rates, but it's something we have to assess going forward and where the risk balance is."

With the next FOMC rate setting meeting scheduled for July 28, Dr Mester declined to be drawn on whether there would be another US rate rise this year. However, she signalled her support for moving rates higher and that rising employment and inflation meant "a gradual increasing pace in interest rates is appropriate."

"I've been one of the more positive members in terms of the US economy. I do think we've made significant progress on the employment part of our mandate and the recent inflation data has been encouraging," Dr Mester said.

"But of course the timing of the next and the ultimate slope of that gradual pace will depend on how the risks around the outlook evolve."

And if all else fails, there is always Bernanke's helicopter, first in Japan then coming to the US.