To avoid a long and ruinous downturn, central banks need to find more ammunition
a decade since America’s latest recession, and it has taken that long for the Federal Reserve to ask itself whether it is ready for the next one. On June 4th officials and scholars will gather in Chicago to debate how monetary policy should work in a world of low interest rates. The benchmark rate is 2.25-2.5%, which gives the Fed little room to cut before hitting zero—and less than half as much as it has needed in past downturns.
Given these pressures, central bankers’ caution should hardly be surprising. They surely fear that overhauling their targets and tools could lead to a free-for-all in which stability and independence give way to populist interference or even economic quackery. But that is not a sufficient reason to hold back. A worse danger is that the world faces a downturn it cannot adequately fight .
However that is likely to prove too modest. Start with targets. Inflation has undershot the Fed’s target 85% of the time since it was announced in 2012. Financial markets expect these shortfalls to continue for years. Investors may well ignore any new pledges from central bankers to get inflation above the target. And even if they believed the Fed, the cut in real interest rates would be too small to offset a bad bust.
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