Fed would probably need to cut interest rates to -2%, far lower levels compared to other world central banks. This will most likely be required if the US economy falls into recession in the next few years, said economist and former adviser to Fed, Marvin Goodfriend.
In the last eight recessions, Fed had to push the short rate 2.5 percentage points below the long term rate. Today, the 10-year rate in the U.S. is 1.5 percent," he noted, saying that would indicate that during the next recession, the Fed would need to cut rates as low as minus 1 percent at a minimum.
The U.S. has near full employment and inflation is moving up toward target. According to Goodfriend, needs to show the flag against inflation, if only to move rates up only slightly, to show that it's on the job.
This is in line with the Fed's statement at the annual meeting of the central bank in Jackson Hole, which was held last week. On it Chairman Janet Yellen's said that the future rise in interest rates is taken into account, and this could happen as early as in September. However, many analysts believe that interest rates will remain unchanged until the end of this year.
Based on Goodfriend opinion the long-term nominal interest rates are likely to remain close to zero for the foreseeable future. This will cut low growth prospects, high debt overhang and higher future expected taxes.
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