adrian orr : we are not alone with monetary policy comment by mr adrian orr, governor of the reserve bank of new zealand, 28 august 2019. * * * it was clear that even in the remote mountain region of the us state of wyoming we were among the crowd. the annual august kansas federal reserve ’ s summit of many of the world ’ s central bankers vividly highlighted our commonality. inflation has been low and stable, and many labour markets are near their peak loading. new zealand included. independent central banks have successfully achieved their inflation goals, promoting economic wellbeing. yet, there was no vigorous back patting. there were mostly furrowed brows. a slowing global economic outlook, increasingly prompted by pockets of volatile politics, is keeping the world ’ s central bankers busy. in response to the economic chill, central banks around the world have lowered interest rates – often to record lows – to promote investment and spending. they continue to pursue their mandated low inflation goals. that ’ s our job. we aim to keep inflation low and stable and contribute to maximum sustainable employment. this is the best we can do as a central bank to promote economic wellbeing. we have the one main instrument – the interest rate lever or price of money – and we use this tool with our best view of what ’ s on the horizon. we provide forward guidance on our expected activity, but remain flexible to incoming data. monetary policy remains as effective as ever, and for small open economies like new zealand, the exchange rate plays a significant additional role in competitiveness. our research gives us confidence that even at these low levels of interest rates, monetary policy remains as effective as ever at providing timely economic stimulus. as the governor of the swedish central bank noted – those who think that monetary policy is losing its vigour should think of the alternative. higher interest rates over recent times would have meant we undershot our inflation and employment goals, have significant weaker activity, and a rising domestic exchange rate – until it was unsustainable. but there are natural limitations to what central banks can achieve with their tools, and if operating alone. global integration, productivity and technology, governments ’ fiscal and regulatory policies, changing demographics, consumer preferences and climate, and unanticipated events – including political volatility – play the dominant role in long - term prosperity. central banks operate within this context and need all policy levers working. my colleagues at the summit were very humble as to our influence over long -

the debt and mortgage - backed securities issued by fannie mae and freddie mac do not. by comparison, marketable treasury securities outstanding outside the government total $ 2. 8 trillion. however, holding debt issued by fannie mae or freddie mac in the fed's portfolio, to the exclusion of other private assets, would, in my view, reinforce the market perception of the special status of federal actually, the fed rarely sells assets outright from its portfolio. most open market operations aimed at withdrawing reserves are done with temporary operations. agency debt. this would increase the subsidy that already exists in this market, potentially further distorting the allocation of credit and resources. any decision to move in this direction, therefore, might be best linked to a broader decision to change the federal reserve act to allow the federal reserve to hold private debt in its portfolio. in that case, federal agency debt could be treated symmetrically with high - grade commercial paper and corporate bonds. similarly, mortgage - backed securities insured by fannie mae or freddie mac should not be treated differently from other highly - rated private debt. of course, holding only federal agency debt, mortgage - backed securities issued or guaranteed by the federal agencies, and other similarly highly - grade private debt would still distort credit allocation by favoring high - grade over other private debt - - but it would dilute the federal agency advantage. federal agency debt and mortgage - backed securities issued or guaranteed by the federal agencies also could be held as part of a wider range of private debt. the fed holds foreign sovereign debt today in order to earn interest on its foreign exchange holdings which it acquired in the course of interventions over the years. the question here is whether the fed should also carry out open market operations by buying and selling such debt. the effect of doing so would be essentially the same as a foreign exchange intervention. this raises a host of questions about the suitability of such operations. it first raises a question of whether such operations would have to be coordinated with the treasury, given that both the treasury and the federal reserve are authorized to intervene in foreign exchange markets and routinely coordinate their interventions. second, buying and selling foreign sovereign debt would have a direct effect on the countries whose assets we were buying or selling and could interfere with their domestic policies. though these considerations weigh against holding foreign sovereign debt in the permanent portfolio, such debt could be used as collateral for dollar - denominated repurchase agreements with dealers. such transactions would not change the currency composition