An unprecedented combination of low U.S. unemployment, weak inflation and low in...
SAN DIEGO - An unprecedented combination of low U.S. unemployment, weak inflation and low interest rates has the U.S. Federal Reserve grappling with how to fight the next recession, as experts debate new approaches to financial regulation as well as a fuller overhaul of Fed strategy.
Not only are low unemployment and weak inflation co-existing but global interest rates are stuck at such low levels, and are considered so unlikely to rise, that the Fed and other central banks may enter the next recession with little room to cut rates before hitting zero and having to decide on other strategies.
The conference produced a flourish of ideas, including a call from former Fed Chair Ben Bernanke to make once-unconventional monetary policy tools like bond-buying a permanent part of the central bank’s arsenal - in effect making the tactics he used to counter the 2007-09 financial crisis a staple part of Fed recession-fighting.
Although it would be politically touchy in the United States, other countries have put stricter limits on mortgage credit, for example, to prevent low interest rates from encouraging risky borrowing. “Some people ... say: ‘I am willing to take the risk of a very low interest rate now,’ and others say the problem with that is, if you do end up with a financial stability problem, the very people you are trying to help are going to be the ones that are hurt worse ... That is kind of the issue. It may be about a time-frame question.”
“Can monetary policy address output and stable prices and something called financial conditions? You need another tool,” said Nellie Liang, a senior fellow at the Brookings Institution and former head of the Fed’s financial stability division.
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