Finance and Economics Discussion Series (FEDS)
August 2016
Gauging the Ability of the FOMC to Respond to Future Recessions
David Reifschneider
Abstract:
Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances.
Keywords: Monetary policy, asset purchases, forward guidance, zero lower bound
DOI: http://dx.doi.org/10.17016/FEDS.2016.068
PDF: Full Paper