Interest Rates Aren’t Our Only Tool For Fighting Recessions

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Neil Irwin offers a different perspective on interest rate cuts from the Fed:

The Fed’s interest rate tools are poorly suited to protect the economy from shutdowns in production resulting from disease fears. Economists can’t invent a vaccine or slow disease transmission rates. On the other hand, you go to war with the recession-fighting tools you have, not those you might wish to have.

But assuming the central bank indeed cuts interest rates to try to buffer the economy from damage, it would find itself with interest rates of around 1 percent or lower, in an economy that is doing quite well, for the moment at least. That leaves little room for further stimulus through that conventional tool. Even a mild downturn would mean the Fed would be looking to less conventional tools, including the quantitative easing policies used extensively from 2009 through 2014, and sending more explicit signals about its intention to keep rates low far into the future.

Irwin is right about this, but it’s telling that he stops where he does. Because there is, in fact, one more conventional tool for fighting a recession: fiscal policy. When interest rates can’t go any lower, Congress can intervene to stimulate the economy with massive deficit spending. This is, admittedly, not a Fed tool, but who cares? In a sane country, it would still be a tool that we could count on if things get bad. The fact that Irwin doesn’t even bother mentioning it is a sign that no one trusts either Congress or the president to act rationally in the event of an economic turndown.

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