Market Watch: Powell Says Fed Will Aggressively Use QE to Fight Next Recession
Article by Greg Robb in Market Watch
Federal Reserve Chairman Jerome Powell said Wednesday the central bank would fight the next economic downturn by buying large amounts of government debt to drive down long-term interest rates, a strategy that has been dubbed quantitative easing, or QE.
In testimony before the Senate Banking Committee, Powell said the Fed had two recession-fighting tools; buying government bonds, known as QE, and communicating clearly with markets about interest-rate policy, routinely considered as “forward guidance.”
“We will use those tools — I believe we will use them aggressively should the need arise to do so,” Powell said.
The Fed has traditionally been able to slash interest rates to fight a recession often by as much as 5 percentage points. But that’s impossible now because the Fed’s benchmark rate is currently in a range of 1.5%-1.75%.
“We will have less room to cut,” Powell said.
As a result, once the Fed trims rates close to zero, if it does, “it is much more likely we will have to turn to the tools we used in the financial crisis,” namely asset purchases and forward guidance, Powell said.
Some economists worry that these tools will not pack much punch in the next downturn. They note that the yield on the 10-year Treasury note is already low, at 1.634% currently, and can’t fall much further.
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