Central Bankers Are Quietly Freaking Out About How To Fight The Next Recession

Authored by Pedro Nicolai da Costavia Forbes.com,

The world’s top central bank officials are rightly concerned that politicians in rich economies missed one key lesson of the last recession: Interest rate cuts can help to moderate a downturn, but aggressive fiscal policy is key to a healthy recovery. 

It was a pro-austerity stance both in the United States, and even more saliently in the euro zone, that arguably prolonged the period of high unemployment and low wage growth that plagued most of the decade-long recovery from the 2007-2009 U.S. Great Recession. 

Outgoing Bank of England Governor Mark Carney told the Financial Times this week that central banks are running low on fuel.

 “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space,” he said.

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“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time.”  

That echoed the sentiment of Christine Lagarde, who recently took over the European Central Bank. She’s telling budget-shy European politicians (especially in Germany) to get to work.

Now, a new paper from Fed board economist Michael Kiley points to similar alarm among U.S. central bankers about their ability to fight future slumps. 

U.S. interest rates likely to go negative in a recession scenario, FEDERAL RESERVE BOARD

Drawing up two basic assumptions of what a downturn might look like, Kiley finds that “a recession may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.”

This, says Kiley, “could imply limits on the ability of monetary policy to support a recovery.”