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Top Fed Economist Says Much More QE Needed to Offset Zero Bound

Cleveland Fed President Loretta Mester

Cleveland Fed President Loretta Mester

Photographer: David Paul Morris/Bloomberg

The damage of the Covid-19 recession will be doubled by the Federal Reserve’s inability to cut interest rates further, unless it employs massive additional asset purchases, one of the central bank’s top researchers said in a new paper.

Bond purchases equal to 30% of U.S. economic output, or about $6.5 trillion, are required to offset the impact of the Fed’s benchmark rate already being nearly zero, wrote Michael Kiley, a senior Fed economist and deputy director of the bank’s financial stability division. The Fed has so far purchased bonds -- through so-called open-market operations and emergency lending facilities -- equal to about $3 trillion since March. That implies another $3.5 trillion is needed, in Kiley’s view, to make up for the monetary policy handicap of zero rates.