‘Maximally Aggressive’
Feroli, who sees that happening at the Fed’s next meeting if not before, invokes research like Williams as justification for his call.
“The reason for a maximally aggressive move at the next meeting has its roots in the optimal control literature, which recommends moving quickly when the effective lower bound on interest rates looms,” JPMorgan’s chief U.S. economist said in a March 9 note to clients.
In his July 2019 speech, Williams said his work shows that the Fed can magnify the impact of its limited interest rate ammunition by acting quickly. It can also enhance its monetary policy firepower by keeping rates lower for longer once they’ve been cut.
Hatzius sees the Fed getting to zero in two steps, with a half-point cut this month and next.
The Goldman Sachs chief economist expects that to be accompanied by action by other monetary authorities, including the European Central Bank and the Bank of England, as policy makers battle a contraction in the world economy.
In laying out the rationale for the Fed’s March 3 emergency rate cut, Chairman Jerome Powell said it was partly designed to avoid a tightening of financial conditions that could hurt the economy.
Unfortunately for Powell and the Fed, financial conditions have gotten tauter since then as the stock market has cratered. Behind the plunge: more bad news on the virus and the lack of action by other policy makers to aid the economy.
After days of playing down coronavirus risks, President Donald Trump’s administration is moving toward a package of support, including a possible payroll tax cut.
But that hasn’t stopped the president from beating on the Fed and pressing it to cut rates more.
Amherst Pierpont chief economist Stephen Stanley said the monetary policy playbook put forward by Williams and others is meant to deal with a conventional recession that can be combated through easier monetary policy. The shock from the virus is different.