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Usually when the economy heats up, the Federal Reserve raises interest rates to cool it down. Then in a recession, the Fed reduces rates to heat it up. Histor
by panarky 7y ago
Usually when the economy heats up, the Federal Reserve raises interest rates to cool it down.
Then in a recession, the Fed reduces rates to heat it up.
Historically, interest rates drop 5 percentage points in recessions.
But since rates are currently just north of 2 percent, there's no room to maneuver. If a recession hits now, the Fed cannot drop rates 5 percentage points. They'll run out of ammunition at the zero lower bound.
- nostromo 7y ago> They'll run out of ammunition at the zero lower bound. QE showed that the Fed has more options than lowering interest rates.
- nickles 7y ago> But since rates are currently just north of 2 percent, there's no room to maneuver. If a recession hits now, the Fed cannot drop rates 5 percentage points. They'll run out of ammunition at the zero lower bound. There's no reason rates cannot go negative. Bund yields (Germany) are negative currently [0]. As a matter of policy, there are other approaches that may be taken. A modified Taylor rule with a zero lower bound may deliver optimal policy if the neutral rate falls below zero [1]. [0] https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany https://www.bloomberg.com/markets/rates-bonds/government-bon... [1] https://www.albany.edu/~bd892/Papers/TaylorRule.pdf https://www.albany.edu/~bd892/Papers/TaylorRule.pdf
- FabHK 7y agoHard to see the Fed go to -3%, though.