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New York Times, April 7, 2017: The Economy May Be Stuck in a Near-Zero World
Carlitos -- While its hard to say what the overall effect the shedding of the bonds will have on the economy, there are some economists who are suggesting that the Fed's low interest rate policy during recessions may have run its course. If we have another recession while the nominal interest rate is still relatively low, then the Federal Reserve's ability to stimulate the economy with interest rates cuts has its limits...a zero interest rate.
If monetary policy changes in interest rate cuts are ineffective, then we will be dependent on Congress to use fiscal policy to stimulate the economy. With the hard case fiscal conservatives in Congress, it is hard to see Congress acting in even a modest way like they did with the stimulus package of spending to halt the slide in the Great Recession. There is even talk of a government shutdown.
So in a sense, I suppose raising interest rates slowly now gives the Fed some room to cut the rates in a recession, whenever that occurs. But shedding bonds from the last recession at the same time as interest rate hikes are occurring could have the wrong effect on the economy.
Just thinking out loud....wondering what's going to happen in the next year with Trump, Congress and the Fed not always working in unison.