MNI POLICY: Fed Paper: Rates Less Effective in Next Recession

--Need to Rely More on Fiscal, Regulatory Tools, Boston Fed Economists Say

By Jean Yung

     WASHINGTON (MNI) - In a paper co-authored by Federal Reserve Bank of Boston

President Eric Rosengren published Thursday, the authors note that the likely

permanent decline in real interest rates means traditional monetary policy tools

like lowering short-term interest rates will be less effective in combating

future economic downturns.

     In that scenario, fiscal buffers and more stringent bank regulations need

to play a bigger role in stabilizing the economy, the Boston Fed economists

said. Yet, they went on to question whether policymakers are willing or even

able to use such policies. 

     "A current concern is the extent to which the United States has sufficient

policy buffers to offset a large adverse shock," the authors said, citing

federal and local governments' having used up financial capacity during this

recovery. 

     For monetary policy, "either building a larger monetary policy buffer or

being more willing to aggressively use nontraditional tools -- will be

essential," the authors said. The former would involve putting enough distance

between nominal interest rates and zero so as to be able to lower them again,

while the latter would encompass expanding the Fed's balance sheet, negative

interest rates and forward guidance. 

     The economists will present their research at a Boston Fed conference this

weekend. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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