January 16, 2013
The severe sort of recession that hit the United States in 2007-2009 is not that rare historically, a top Federal Reserve official said on Thursday, suggesting policymakers need to better understand how to operate with interest rates at rock bottom.
San Francisco Fed President John Williams presented a paper on monetary policy at the so-called zero lower bound to kick off a Brookings Institution event, where Fed Chairman Ben Bernanke would later speak.
He also said that buying bonds to stimulate the economy is a “blunt tool” that works but that remains little understood.
Williams said there is a lot of uncertainty whether the so-called quantitative easing policies (QE), which have been used since the Great Recession, work through signaling to investors or due to imperfections in the marketplace. The size of the effects are also unclear, he said.
Williams said the Fed needs to better understand whether its 2-percent inflation target offers an appropriate buffer for the economy in recessions, adding he had not decided either way.
Meanwhile, he said recent economic events are not rare or unprecedented, as many have characterized them. “History teaches us that very large downturns are not only possible — they are probable,” Williams was to say according to prepared remarks.
“When looked at through the lens of the postwar U.S. experience, the depth and duration of the recent recession may appear extraordinary,” he said. “However, a broader look at economic history and events around the world teach us that deep and long-lasting downturns are not that rare.”
In response to the Great Recession, the Fed has kept interest rates near zero since 2008 and has promised to keep them there for a while to come. It has also bought some $3 trillion in bonds to lower borrowing costs in financial markets.
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