The Federal Reserve has taken unprecedented steps in recent weeks to cushion the U.S. economy from the effects of the expanding coronavirus pandemic, including slashing its benchmark interest rate back to zero and eliciting the usual cries that the central bank is “out of ammunition.” Nothing could be further from the truth.
It’s not just the cynics that feel the Fed is now impotent. One of its own officials suggested as much when Federal Reserve Bank of Cleveland President Loretta Mester dissented against the Fed’s move to reducing rates to zero, arguing that it needed to reserve capacity for future rate cuts if needed. This was a silly argument. Policy rates of 1.50% to 1.75% were so low already that any recession, however moderate, would bring them down to zero anyway. There was no point in reserving capacity.
