US: Is the Fed’s current monetary policy toolkit enough for the next recession? – Goldman Sachs

Research Team at Goldman Sachs, suggests that downward revisions to the estimated equilibrium funds rate have raised concern that the Fed might have too little ammunition to fight the next recession.

Key Quotes

“Starting from the FOMC’s longer-run estimate of 3%, the Fed would have less room to cut than is typical in a recession.

A new paper by senior Fed economist David Reifschneider argues that such concerns are overdone. Using the FRB/US model, he finds that the Fed’s new tools—forward guidance and quantitative easing—are sufficient to offset the reduced space to cut the funds rate within the existing policy framework.

While we sympathize with this point, the paper does not address whether the Fed has sufficient tools to support growth should a downturn arrive sooner. We find that the impact of the easing package assumed in the paper would be diminished under current market conditions. Both the low current level of interest rates and concerns about the efficacy of additional forward guidance and QE temper the reassurance provided by the Fed’s expanded toolkit.”