Powell said that the Fed would resort to tools it used in the last recession if it’s again forced to lower short-term interest rates to zero.
They are quantitative easing -- in which the Fed buys Treasury bonds to drive down long-term interest rates -- and forward guidance on the future direction of short rates.
The Fed chief though made clear that the central bank would not follow the lead of its counterparts in the euro zone and Japan and push rates below zero. “In the U.S. context, that’s not a tool we’re looking at,” he said.
He also dismissed a suggestion that the central bank consider directly funding the government so it can cut taxes and boost spending in a recession.
“That’s really an untested and not widely supported perspective,” he said.
Policy Coordination
Some economists though think the Fed might have to go that far if the economy turns bad enough.
In a paper last year, former Fed Vice Chairman Stanley Fischer and ex-Swiss National Bank chief Philipp Hildebrand said “unprecedented policy coordination” may be needed to deal with the next downturn, including central banks explicitly financing bigger government budget deficits.
To make room for future fiscal actions to aid the economy, Powell urged lawmakers on Tuesday to rein in budget deficits now.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policy makers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” he said.
His comment came in the wake of the release on Monday of President Donald Trump’s latest budget plans, which would push the gross federal debt above $30 trillion over the next decade.