A question at the Federal Reserve has been whether to raise interest rates just so they will be high enough to cut again if a financial crisis presents itself with the need to cut rates, said Russell Evans, Ph.D., executive director of the Steven C. Agee Economic Research & Policy Institute.
The Edmond Economic Development Authority presented its 2019 Market Forecast at a recent gathering at the Edmond Conference Center.
Challenges to U.S. economic activity and the Oklahoma metroplex were highlighted by Evans, executive director of the Steven C. Agee Economic Research & Policy Institute.
“The historical rates for a recession is usually a 2%-2.5% cut in the federal funds rate,” Evans said. “So if you get to 2.5% to 3% — so if something happens we can come back down to 0% to 1/2% — or do we just cut and now we’re back to quantitative easing?”
In September the Federal Reserve cautiously lowered interest rates by a quarter of a percent to a range of 1.75% to 2% in an effort to stabilize the ongoing 10-year old economic expansion. President Trump has been calling for deeper rate cuts.
In a financial crisis the Federal Reserve has taken to paying interest in access to help banks develop access reserves and hold them, Evans said.
“Maybe the thought process is now the response of cutting the federal funds rate,” he said.
The dangerous response is to have banks earn less on access reserves for money to flow in the economy.
“That’s part of the debate on the monetary policy side — what would be the response if we did get into a recession — would it be the federal funds rate? Would it be quantitative easing? Would it be cutting the interest rate we have that we have on access reserves? Or, would it be something of all three?”
Evans said the answer lies in uncharted territory without a historical example.