Ronald Reagan’s economic adviser and Harvard economist Martin
Feldstein notes:
“But if a recession
begins as soon as 2020, the Fed will not be in a position to reduce the federal
funds rate significantly. Indeed, the Fed now projects the federal funds rate
at the end of 2020 to be less than 3.5%. In that case, monetary policy would be
unable to combat an economic downturn.
The alternative is
to rely on fiscal stimulus, achieved by cutting taxes or increasing spending.
But with annual budget deficits of $1 trillion and government debt heading
toward 100% of GDP, a stimulus package would be politically difficult to enact.
As a result, the
next economic downturn is likely to be deeper and longer than would otherwise
be the case. If the government at that time chooses to use fiscal policy, the
future debt-to-GDP ratio will rise further above 100% of GDP, forcing long-term
interest rates even higher. It is not an attractive outlook.”
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