Re:10-Year Treasury Constant Maturity Minus 3-Month Treasury...
by nostromo on Sunday June 02, 2019 @03:50PM
(#20077646)
> They'll run out of ammunition at the zero lower bound.
QE showed that the Fed has more options than lowering interest rates.
Re:10-Year Treasury Constant Maturity Minus 3-Month Treasury...
by nickles on Sunday June 02, 2019 @03:40PM
(#20077564)
> But since rates are currently just north of 2 percent, there's no room to maneuver. If a recession hits now, the Fed cannot drop rates 5 percentage points. They'll run out of ammunition at the zero lower bound.
There's no reason rates cannot go negative. Bund yields (Germany) are negative currently [0]. As a matter of policy, there are other approaches that may be taken. A modified Taylor rule with a zero lower bound may deliver optimal policy if the neutral rate falls below zero [1].
[0] https://www.bloomberg.com/markets/rates-bonds/government-bon...
Then in a recession, the Fed reduces rates to heat it up.
Historically, interest rates drop 5 percentage points in recessions.
But since rates are currently just north of 2 percent, there's no room to maneuver. If a recession hits now, the Fed cannot drop rates 5 percentage points. They'll run out of ammunition at the zero lower bound.