At that point, Fed officials are left with unconventional tools, such as purchases of longer-dated Treasuries -- known as quantitative easing. The effectiveness of such tools when longer-term rates are already low remains to be seen.
The Fed is in the midst of a review of its tool kit to achieve its goal of maximum employment and stable prices. They are considering policies such as outcome-based forward guidance, where a policy change would be linked to some tangible metric such as achieving an inflation rate, and yield curve caps.
Wherever the discussion lands, the virus has highlighted the need for better fiscal and monetary policy coordination in a time of exceptionally low interest rates, says Julia Coronado, the president of MacroPolicy Perspectives.
The Fed is “carrying the domestic burden and the global burden,” Coronado said. “The fiscal policy response has been lacking. There are people that are going to be struggling to pay their bills and certain workers are going to lose incomes. This is the shock that needs to be insured and we are really behind the curve.”
--With assistance from Sophie Caronello, Alexandra Harris and Alister Bull.
This article was provided by Bloomberg News.