Photograph by Jeff Hutchens — Getty Images
By Chris Matthews
March 1, 2016

U.S. stock markets had a Super Tuesday, with the S&P 500 gaining 2.39%, but the latest moves haven’t quieted Wall Street fears of a coming recession.

Though most economists don’t see a recession coming this year, the number that do are on the rise. If and when it does come, analysts are starting to worry that the recession will be longer than most. “If a recession were to occur, it might be shallow but somewhat more extended than the 1990 and 2001 episodes since interest rates can’t be lowered as much,” said Kevin Logan, chief U.S. economist for HSBC Securities, to Bloomberg News on Tuesday.

The reason? The Federal Reserve doesn’t have nearly the room it is used to having, in terms of the ability to lower interest rates, as it usually does. Economist David Beckworth recently explained the problem in an essay for the Financial Times:

The real reason for this [problem] is the Fed’s firm commitment to low inflation. Like a governor placed on a truck’s engine to control its speed, a commitment to low inflation helps prevent the economy from growing too fast. Normally, this is a good thing. But sometimes it can backfire. A truck driver may need to temporarily go faster to make up for lost time after being stuck in traffic. Similarly, an economy may need to temporarily speed up to get back to its full potential after a recession. Neither can happen with a rigid adherence to the speed limit.

Beckworth argues that the Fed should abandon its inflation target for a nominal growth target instead. This would allow the Fed to tolerate higher inflation during periods of low growth (as we are experiencing now), to be made up for with periods of lower inflation when growth is strong.

 

Not everyone buys Beckworth’s argument that nominal growth targeting will be a cure-all. Former Treasury secretary Larry Summers, for instance, has given a half-endorsment to the idea, but has been much more forceful in his argument that today’s low inflation environment is a signal that governments around the world should be spending more to prop up weak demand.

 

SPONSORED FINANCIAL CONTENT

You May Like

EDIT POST