Gauging the Ability of the FOMC to Respond to Future Recessions
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.
JEL Classification: E5;
File(s): File format is application/pdf http://www.federalreserve.gov/econresdata/feds/2016/files/2016068pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2016