Poor Man’s Monetary Policy Lurks in a Low-Neutral Rate Future

• New York Fed President John Williams and his co-authors concluded in their research that neutral interest rates had fallen across advanced economies thanks to demographics, slower productivity growth, and other factors.
• With rate setting expected to stay at its current 2.25% to 2.5% target range -- roughly Williams’ current estimate of the neutral rate, it means the Fed policymakers will have less room to cut rates to stimulate growth come to the next recession than they’ve historically enjoyed.
• Come the next downturn, officials will likely be “reduced to poor man’s monetary policy – changing the size and composition of the Fed’s balance sheet,” Citigroup’s Willem Buiter wrote in a March 19 note.
• The euro area and Japan may enter the next recession with still-negative rates, and neutral rates are unlikely to save the day by rising anytime soon.

 (Source: Bloomberg)