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Gauging the Ability of the FOMC to Respond to Future Recessions

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  • David L. Reifschneider
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    Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances.

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    File URL: http://www.federalreserve.gov/econresdata/feds/2016/files/2016068pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2016-068.

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    Length: 26 pages
    Date of creation: 2016
    Handle: RePEc:fip:fedgfe:2016-68
    DOI: 10.17016/FEDS.2016.068
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