The next recession is likely to force the Federal Reserve to once again buy up large amounts of assets to boost the supply of money and stimulate the economy, a move that nearly a decade ago was considered drastic and unconventional, according to Boston Federal Reserve president Eric Rosengren.
During a speech Wednesday at Bard College in New York, Rosengren said that such purchases — called quantitative easing — will probably become a go-to tool for the Federal Reserve in dealing with recessions. Low inflation, limited productivity growth, and an aging population “may necessitate more frequent use of large-scale asset purchases during recessions,” he said.
A longstanding inflation-fighting method — lowering interest rates — may no longer be enough, he said. The Fed raised the key benchmark rate by a quarter percentage point last December and then again in March, but rates remain historically low and are likely to stay that way for a long time. That will give the Fed less room to lower interest rates enough to stimulate the economy in the event of another economic downturn, Rosengren said.
Following the 2008 financial crisis, the Federal Reserve purchased mortgage- and Treasury-backed bonds, increasing its balance sheet from $900 billion to $4.5 trillion. The Fed’s policy-setting board has started to talk about winding down that balance sheet as early as this year.
Rosengren, a nonvoting member of the Fed’s Open Market Committee, said the central bank should begin reducing its balance sheet relatively soon in “a very gradual” fashion.Deirdre Fernandes can be reached at email@example.com. Follow her on Twitter @fernandesglobe.