Fed Ready For Downturn: Reports


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  • From the Australian

A new Federal Reserve paper argues the central bank has the tools it needs to respond to deep future recessions by using rounds of asset purchases and a clear communications strategy to reassure investors and consumers.

In most cases, policy makers would be able to use quantitative easing and forward guidance in the same way they used them in the aftermath of the 2007-2009 recession to combat a similarly sharp downturn, according to the paper by Fed economist David Reifschneider.

Fed officials and economists are becoming increasingly worried that long-term economic changes, such as an ageing workforce, lower productivity growth and the rise of emerging-market investors, will hold down interest rates and inflation for the foreseeable future. That will constrain the central bank from raising its policy rate much further than 3 per cent in the coming years. Right now, that rate is stuck between 0.25 per cent and 0.5 per cent.

In the past, small adjustments to interest rates have been the Fed’s preferred method for making monetary policy. But the new era will give the Fed much less ability to respond to shocks. That means officials will have to find new ways to deliver a short-term economic jolt.

How to respond to the next recession is a growing preoccupation among Fed officials, one that will likely dominate much of the discussion at next week’s annual monetary policy conference in Jackson Hole, Wyo. Fed Chair Janet Yellen is to deliver a speech on the Fed’s monetary policy tool kit on Aug. 26, when she could well discuss Mr Reifschneider’s conclusions.

The Fed study counters a paper earlier this week from San Francisco Fed President John Williams suggesting the Fed’s tool kit may not be enough to tackle future downturns. Mr Williams suggested study a possible change of the Fed’s inflation target as a way to adapt to the new world of lower interest rates. Mr Williams raised the possibility of either raising the Fed’s inflation target above 2 per cent or replacing the inflation target with a new target based on prices or economic growth rates.