Jared Bernstein in the WAPO:
Simply put, in a period with very low interest rates, fiscal policy may well pack more punch than monetary policy and thus becomes that much more important, especially in recession. I don’t know when the next downturn will hit, but between now and then, I’ll be trying to help policy makers understand this reality.
Greg Ip in the WSJ:
Research by John Williams, president of the Federal Reserve Bank of San Francisco, and Fed economist Thomas Laubach suggests the equilibrium rate could be as low as 2%, or zero when adjusted for inflation. This means the Fed may have only two percentage points of interest-rate cuts available to fight the next recession (compared with 5.25 points in 2007).
“I am worried that a very low equilibrium rate makes it harder for monetary policy to do the full job of counter-cyclical stabilization policy in downturns,” Mr. Williams said in an interview. That, he said, means fiscal policy will need to play a bigger role.
It appears even central bankers are giving up on monetary policy!
That´s a dangerous attitude because it increases the likelihood of a recession creeping in. Why? Because if you think of monetary policy as interest rate policy, even with extremely low interest rates monetary policy can be tight (or being tightened) and you will be blindsided!
Update: Scott Sumner posted “Who’s afraid of level targeting?”. From the chart below, it appears that you should be afraid if you don´t level target!