Forex Analysis & Reviews: 07.05.2019 - The Fed is working to solve...

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07.05.2019 01:33 AM

The Fed is working to solve the problems of the world economy in conditions of low inflation

The Fed fears that it is poorly prepared to deal with the next recession as part of its current approach to targeting inflation. In addition, efforts are being made this year to test new interest rate management strategies around the world with low inflation and borrowing costs. But US central banks and monetary policy experts face a more difficult task: not only to create a solid foundation before the next recession, but also to convince the public that this actually works.

When central banks around the world turned to unconventional instruments, such as bond purchases and forward management, to deal with the financial crisis of 2007–2009, they thought they were faced with unique conditions. But a decade after the end of the Great Recession, it is clear that the Fed is dealing with a new economic norm. It is expected that neither inflation nor interest rates will rise significantly, even if unemployment in the United States reaches an almost 50-year low. This leaves the US central bank with much less opportunity to lower interest rates in order to stimulate the economy. Thus, this year, when the US economy is stable, interest rate policies are paused, the Fed believes they have a breather to figure out how to make policies more effective when the next recession occurs.

Among the ideas: to commit to compensating for periods of low inflation with periods of inflation above the target; look at the final economic result, rather than inflation; use negative interest rates to force enterprises to invest and banks to lend during a recession. All of these measures will act as shock absorbers to alleviate economic weakness and reduce recession. Weighted average inflation targeting is the base case, which still receives the most support. The idea, as explained by the President of the Federal Reserve Bank of New York John Williams, is to focus on the average inflation for a certain period, for example, for a year and a half.

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