A more credible Fed plan to fight a possible recession in 2020, 2021, or thereafter might well boost business confidence and make the central bank’s policies more effective. At the very least, it would reassure companies and investors who, fearing that US aggregate demand will be weak in 2020, might be starting to pull back. But this third option would require an aggressive intellectual and communications effort from the Fed, and there is currently no evidence of one.
If the US falls into recession over the next year or two, the Fed may have very little room to loosen policy. And yet it is not taking any steps to cover that risk. That is unwise. Unless the Fed buys some recession insurance soon, the US – and the world – may well face much bigger problems later.
J. Bradford DeLong is professor of economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was deputy assistant U.S. Treasury secretary during the Clinton administration, where he was heavily involved in budget and trade negotiations.