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Reuters/Eduardo Munoz
Hoping not to hit a wall
OUT OF RUNNING ROOM

The Fed won’t be able to save us during the next recession

A recently published report (pdf) by the Roosevelt Institute suggests that the Federal Reserve won’t have the same influence in the next recession because there isn’t enough room to drop interest rates as much as has been required in the past.

Historically, the Fed has had to drop rates by 5-6 percentage points during recessions; it cut rates by 6 points in 1990, 5.25 points in 2005, and 5.25 points—down all the way to zero—during the Great Recession of 2008.

With rates forecast (by the Fed itself) to only go as high as 3.1% by 2020, there’s not much scope to stimulate the markets by cutting them significantly if another recession was around the corner. And many economists do expect a recession soon—as early as next year or 2020.

The Roosevelt Institute said:

When the next recession happens, it’s unlikely that reducing the short-term interest rate will be enough to stabilize demand, simply because rates will almost certainly not be high enough for a big enough rate reduction to give the economy the boost it will need.

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