The Federal Reserve has more ammunition to fight the next recession than many people think, according to a former leader of the U.S. central bank.
Much has been made by the fact that the Fed historically has been able to cut interest rates by about 5-and-a-half percentage points to revive the economy after a recession.
There is concern in the era of low interest rates. The Fed’s benchmark interest rate is now set in a range between 1.75% and 2%, giving them relatively less space to operate.
All is not lost, according to Ben Bernanke, who led the Fed through the aftermath of the Great Recession.
He estimate the Fed’s so-called unconventional policies, if used wisely, are the equivalent of 3 percentage point of interest rate cuts.
Those policies are forward guidance, bond buying, commonly called quantitative easing, and a new policy-framework that includes a “makeup strategy” for inflation, he said.
“So my sense is as long as nominal neutral rates are 2.5%-3%, that the Fed will be able to do most of what it could do at any point in history,” he said.
If the neutral rate does sink further, the Fed could be in a “difficult situation,” he said.
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