Is There Any Ammo Left for Recession Fighting?

Real Clear Markets ^ | April 21, 2016 | George Perry

[expat_panama]

A government's arsenal for moderating business cycles consists of fiscal and monetary policy. But the U.S. has little scope for using either if a new recession should now emerge. The Fed has only limited options left for stimulating the economy. And political gridlock may prevent any timely injection of fiscal stimulus. How big are the risks we face, and are we really out of options?

Fortunately, continued expansion is the central forecast for the U.S. economy today. Janet Yellen's public assessments of the outlook are screened less for signs that the economy may need renewed policy easing and more for clues about when the next rate increase will come. But economic forecasts come with a considerable range of uncertainty, and the downside risk is greater if policies cannot be counted on to respond.

Monetary policy is not out of stimulus options, but they are limited. The recovery of the U.S. economy from the Great Recession owes a lot to the Fed's aggressive and creative use of monetary policy under the leadership of both Ben Bernanke and Janet Yellen. This included dropping the short-term policy interest rates to zero and the quantitative easing program in which the Fed bought large amounts of longer-term securities, including private mortgages as well as government bonds. The recovery would not have been as successful without these policies, especially when foreign economies were weaker and their interest rates even lower. But having already taken these steps, there is now less room to do still more.

For a start, short-term rates could be pushed back to zero or even be made moderately negative, say minus 0.25 percent. As odd as it may seem to pay a bank to hold your money, or your firm's money, short rates are already negative in Japan and much of Europe.

Nonetheless, rates could go only slightly negative without causing serious problems for some financial institutions. And that would not be enough. In fighting past recessions, the Fed has promoted declines of 5 percentage points or more in short term rates. A half-percentage point decline would be far too little to matter much in a new recession.

The Fed could also return to its QE program. And it could do more by buying bonds so as to directly peg longer term rates, which could require much larger purchases than the QE program made. During World War II and its aftermath, the Fed pegged bond rates because the aim of policy was to hold down the Treasury's borrowing costs. In the Accord of 1951, it obtained the independence to direct policy at stabilizing the economy. Pegging long bond rates now would be a more forceful policy than just pegging short term rates. But with 10-year Treasuries already yielding less than 2 percent, the monetary stimulus available from pegging them lower would be limited.

This leaves fiscal policy as the main tool now available for fighting recession. In a normal political climate, we would expect Congress and the President to come up with some quick and strong fiscal response to any new downturn, as they did in 2009. But there is little chance of such cooperation in today's political climate, and this year's elections could continue the political gridlock.

Congressional willingness to take countercyclical steps that boost the deficit may be further reduced by the widespread agreement about the need to reign in the growing national debt n for the long run: Under current policies the Congressional Budget Office projects debt as a percent of GDP rising from 75 percent this year to 86 percent in 2026, and continually higher thereafter. There is no conflict between reigning in our growing debt in the long run and using countercyclical policies when they are needed. But that is a more complicated political speech to give than one that ignores the difference.

Europe is even more at risk and more in need of expansionary fiscal policies. And the hurdles are greatest among the Euro Zone economies where the flexibility to set separate fiscal policies is severely constrained.

Euro zone interest rates are already negative. And Draghi's European Central Bank, with the permission of Germany and other Euro zone nations, is presently buying bonds to finance member nations' deficits arising from the deep recession. As last year's showdown over Greek deficits showed, adding fiscal stimulus to the depressed nations' budgets is not permitted under present understandings.

If Germany allowed the use of fiscal stimulus, it would greatly enhance the usefulness of ECB bond purchases and the effectiveness of policies to fight recessions in the Euro zone. It would reduce today's economic risks and would also strengthen the Euro zone structure for the future.

Unfortunately, the chance of getting this move toward greater integration within the Eurozone seems, if anything, smaller than the chance the U.S. Congress and the President will cooperate over fiscal policy next year.

Perry is a senior fellow in Economic Studies at the Brookings Institution and the co-founder, with Arthur Okun, of the Brookings Panel on Economic Activity and its journal, BPEA.

[expat_panama]

imho the title question's answer is clearly 'NO'.

It it had to the Fed's got plenty of room for expanding the money supply and congress has not even begun to cut taxes.  Still,  the writer's got tunnel vision if he sees an economy affected by only "fiscal and monetary policy" because we have to remember Congress' legislative policy that can go a long way to cutting back restraints on econ activity, and the President's current social policy that's constantly on the attack of "fat cat" investors, banks, and everyone else working in America's capital markets.

[onona]

When you count on the fed for everything, you are guaranteed a losing hand. Drop corporate and individual tax rates by half and you just injected adrenalin into the patient.

[expat_panama]

Good Morning Investors!   Gains pile up all around as metals continue their climb (silver's about to top its previous May '15 peak) and stocks managed to squeak up a bit it softer volume.  Futures see a bit more today, stock indexes +0.13% and metals +0.11%. 

Yuge document dump from Bean Counter Central:

8:30 AM Initial Claims
8:30 AM Continuing Claims
8:30 AM Philadelphia Fed
9:00 AM FHFA Housing Price Index
10:00 AM Leading Indicators
10:30 AM Natural Gas Inventories

New FR econ threads:

• "This Is Going To Be A National Crisis" - One Of The Largest U.S. Pension Funds Set To Cut Retiree (hat tip to Chgogal)
• The Great American Economic Growth Myth——-Real GDP Gains Since 1999 Even Lower Than 1930s
• Intel Corp. (INTC) To Cut 12,000 Jobs Globally, Or 11% Of Its Workforce As PC Sales Plummet

Other news:

"This Is Going To Be A National Crisis" - One Of The Largest U.S. Pension Funds Set To Cut Retiree (hat tip to Chgogal!)
Oil surge drives world stocks higher, ECB looms A Saudi Dump of U.S. Assets Will Only Hurt Saudis - Weifeng Zhong, RCM
Don't Forget, Big Corporations Are Big Employers - Justin Fox, Bloomberg
Trump's Policies Will Have Trumpkins "Mad as Hell" - John Tamny, RCM
Little Sign The Bull Run Will Stop Soon - Lawrence McMillan, MarketWatch
Teaching Wrong Lesson Abt Student Debt - Hadley Heath, Washington Post
What Did Fed Chairman Yellen Tell Obama? - Ron Paul, Mises Institute

[WashingtonSource]

The quiver is all out of arrows.

[ClearCase_guy]

I think you are spot on.

We are at an inflection point. We either will have widespread common misery and increased failure and socialism, or we will begin dismantling federal over-reach and tyranny.

Small measures are not an option.

[expat_panama]

count on the fed for everything, you are guaranteed a losing hand

How about changing "everything" to "anything" --as far as employment/production goes.  Fed wonks will be the first to point out that their function and the tools they got are monetary only, they control inflation and they know it the free market that does the hiring. 

[cassiusking]

There is nothing manufacturing to respond to fiscal or monetary policy, We don’t need any more houses or malls or highways

[ctdonath2]

“Is There Any Ammo Left for Recession Fighting?”

Nope. With .22LR unavailable for so long, and everyone with more centerfire than they can sanely use in a lifetime ...

[CincyRichieRich]

Lowering corporate tax rate. Our congress and senate are just as corrupt and evil as - err perhaps a bit less - than 0bama. It’s amazing that either they fear him (all 165 lbs of linguini commie pipe-smoking butt boy pajama boy)or worship him.

[Flick Lives]

Nonetheless, rates could go only slightly negative without causing serious problems for some financial institutions.

Brings a new meaning to the term "bank robber".

[Neidermeyer]

Fed action has always been ineffective in the long run... the premise of the question is dead wrong.

[CIB-173RDABN]

I am not an economist nor do I play one on TV, but it is my opinion the best thing for any economy is stability.

Businesses need to plan for the future but today it is almost impossible with new rules, laws and regulations coming out almost daily.

Want the economy to improve, get the government out of the way.

If nothing else, stop all new rules, laws and regulations.

But it would be better to roll back many of them ten or fifteen years.

Fake man made global warming and fake environmental concerns and fake social engineering are all killing our nation.

The bottom line, the government is the cause, not the solution.

[PeterPrinciple]

The bottom line, the government is the cause, not the solution.

---

I find that many conservatives here see the government as the solution. I have been told that “our laws are better.”

My choices are liberal big government or conservative big government. I think you see the problem too.

[expat_panama]

roll back many of them ten or fifteen years.

Absolutely, that's about where I'd put it too.  Of course we got a lot of freepers that wud prefer cutting back to 1900 before the income tax and the Fed, still others would repeal everything back before the mid 1800's 14th amendment, but imho a decade or two is a good start.

[expat_panama]

...conservative big government...

That's where we go wrong w/ setting aside policy issues and dividing up into partisan factions.  Policy matters, so no matter what u call me I want to wind back gov't power.  Sometimes I get a lot of flack from the protectionists, immigration hawks, and the English only crowd but everyone plays favorites, even me..

[cassiusking]

Interest rate changes used to make or break manufacturing in the 70’s and 80’s

[Yosemitest]

Try Georgia-Arms.com.