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Justin Lahart's Why The Fed Isn T Out Of Ammo

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Eliminating the zero lower bound is the crucial next step in order to allow the Federal Reserve to focus solely on the federal funds rate rather than use unconventional monetary policy.

Despite the positive jobs report last Friday, it doesn't look like the Fed is going to raise rates at their March meeting. Even though the Fed probably won't be raising the interest rate, it looks like the U.S. economy is still experiencing an expansion. If the economy suddenly goes into a recession, will the Fed have the tools to stimulate the economy?

In Justin Lahart's Wall Street Journal article, "Why the Fed Isn't Out of Ammo", he argues that the Fed still has tools that would stimulate the economy even with interest rates already being so low. He acknowledges that quantitative easing has limited effects and has not proven that it is a useful monetary policy too. Justin then suggests that the Fed could experiment with "helicopter drops", buying foreign assets, or pledging to keep mortgage rates …show more content…

The Fed doesn't need to resort to these unconventional techniques, but should instead stick to the tools that are proven and that the Fed has successfully implemented time and time again. The Fed needs to stick to focusing on raising and lowering the interest rate. The one problem with this is the zero lower bound.

With the current system, the Fed could potentially drop the interest rate into negative territory like the Bank of Japan and the European Central Bank have recently done. Say the Fed could drop the interest rate to negative 1% without the the Fed worrying about people hoarding cash. Now if the economy went into another deep recession like the Great Recession, it wouldn't be enough to drop the interest rate interest rates to negative 1%. The Fed would have to use unconventional monetary policy tools along with this interest rate drop in order to move the U.S. economy in the right direction.

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