When the economy stumbles, can the Fed still catch its fall?
A growing number of economists, market analysts and investors worry that the answer is no. The Federal Reserve’s radical approach to monetary policy since the financial crisis, they believe, has confounded its ability to do anything about a potential downturn — or an unexpected shock to the economy.
Worse, others argue that by staying with a zero interest rate for so long, the Fed has put itself into a box. Even as the economy has expanded, the Fed has refrained from raising interest rates. Now, if the economy should crumble, the Fed has nowhere to go — at least, not using its conventional tools.
It’s not for lack of trying. Since the 2007-08 financial crisis, the Fed has cut interest rates to zero, printed nearly $4 trillion in new money through “quantitative easing” and exercised sweeping new powers over the banking system.
And yet, since 2008, GDP growth has slipped from its previous 3% long-term path to a mere 2% pace, and GDP is at least $3 trillion less than it would be in a normal recovery. The economy sputtered to a 0.5% annualized gain in the first quarter, and employment, consumer and industrial data all signaled a lackluster spring. Despite its increasingly activist policy measures, Fed influence on the economy’s course now seems weaker than ever.
http://www.investors.com/news/economy/after-8-years-of-unconventional-moves-is-the-fed-in-a-box/
A growing number of economists, market analysts and investors worry that the answer is no. The Federal Reserve’s radical approach to monetary policy since the financial crisis, they believe, has confounded its ability to do anything about a potential downturn — or an unexpected shock to the economy.
Worse, others argue that by staying with a zero interest rate for so long, the Fed has put itself into a box. Even as the economy has expanded, the Fed has refrained from raising interest rates. Now, if the economy should crumble, the Fed has nowhere to go — at least, not using its conventional tools.
It’s not for lack of trying. Since the 2007-08 financial crisis, the Fed has cut interest rates to zero, printed nearly $4 trillion in new money through “quantitative easing” and exercised sweeping new powers over the banking system.
And yet, since 2008, GDP growth has slipped from its previous 3% long-term path to a mere 2% pace, and GDP is at least $3 trillion less than it would be in a normal recovery. The economy sputtered to a 0.5% annualized gain in the first quarter, and employment, consumer and industrial data all signaled a lackluster spring. Despite its increasingly activist policy measures, Fed influence on the economy’s course now seems weaker than ever.
http://www.investors.com/news/economy/after-8-years-of-unconventional-moves-is-the-fed-in-a-box/
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