Fed Is Edged Out by Israel as Top Pick for Unconventional Easing

(Bloomberg) --

Hounded for months by President Donald Trump to cut interest rates below zero, the Federal Reserve still isn’t the top contender to wade into unconventional monetary policy, according to Nomura Holdings Inc.

The Bank of Israel, with inflation below target and the lowest positive policy rate in the world, is the likeliest to take the plunge next, Nomura analysts led by its head of global macro research in Singapore, Rob Subbaraman, said in a report Thursday. The U.S. is a runner-up, the bank’s scorecard found.

“With dwindling traditional ammunition, a number of smaller economies appear closer to following their larger-country counterparts into unconventional monetary policy,” the analysts said.

Boxed in by rates near zero and running out of options to rev up economies and inflation, a new crop of central banks could opt for unorthodox policies. The unconventional tools range from negative borrowing costs and large-scale asset purchases to deposit tiering and targeted lending. To build its ranking, Nomura looked at countries’ economies, the scope for conventional monetary easing, and suitability for unconventional measures.

Read more: Israel Signals Rates May Go Below Zero With Easing Back on Table

Although Bank of Israel Governor Amir Yaron said last month that negative interest rates were a possibility, Nomura’s economists said policy makers may instead restart large-scale currency purchases to stem appreciating pressure on the shekel.

As for the Fed, it’s more likely to use forward guidance and large-scale asset purchases to fight the next recession, but won’t cut rates below zero, Nomura’s economists said.

Read more: What Trump Can (And Can’t) Do to Steer Fed Policy

It’s a conclusion likely to draw Trump’s ire. On Thursday, the U.S. president resumed his attacks a day after the Fed lowered rates for the third time this year and signaled a pause in further cuts unless the economic outlook changes materially.

Despite the growing number of policy makers looking at non-traditional monetary tools, such measures face numerous challenges, Nomura’s analysts warned. Risks could affect financial stability, wealth inequality and even central bank independence, they said.

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