Yale University Economics Professor and Nobel Laureate Robert Shiller warns that the United States could very well return to economic stimulus in the form of quantitative easing if the current stagnation continues.
The Federal Reserve's carefully scripted decision to raise interest rates last December, and begin a return to "normal" policy, may now become a nightmare for the U.S. central bank if an economic downturn forces a return to unconventional methods.
Fed Chair Janet Yellen recently told lawmakers she was studying ways to "be prepared" in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis.
A return to quantitative easing or bond buying to counter another recession would face doubts though also. The initial round of U.S. quantitative easing is thought to have helped battle the financial crisis when it was launched in December 2008, but even sympathetic policymakers have questioned how much impact two subsequent rounds of bond buying had on jobs, investment and economic growth.
Shiller thinks a fourth round of QE isn’t off the table, but is far from a certainty.
“If things get bad, yes. They are not on the track right now, but that is the tool that is widely admired and I think that if it does get bad, they will certainly go back,” he told the Economic Times.
Shiller, however, doesn’t think the U.S. is headed to another 2008-like crisis.
“First of all, the 2008 crisis was bad. So, it would be foolish to predict something that bad again. We do see some improvements. For example, banks have higher capital now. On the other hand, it does have a risk of becoming a crisis. But it is hard to predict these things,” he said.
He also doesn’t think world central banks like the Federal Reserve are totally to blame for all of the economic woes.
“I do not think they are primarily responsible. I think there is a tendency to exaggerate the importance of central banks when they are doing a good job. There was a weakness in the world economy and there was some effort to stimulate it," he said.
"Now, it did have an exaggerated impact on financial markets. Maybe they should have been more concerned about that but I do not think I would pin most of the blame on them. I think we cannot expect them to control everything perfectly,” he said.
Some experts feel the central bank will eventually have to make some tough decisions to boost economic growth.
"The policy options for the Fed are not great," Jon Faust, a Johns Hopkins University economics professor and former adviser to the Fed's Washington-based Board of Governors, recently told Reuters.
Quantitative easing "made a lot of sense" as an effort to prime a nascent economic recovery, Faust said, "but that is not the same as turning an economy that is heading down."
With short term U.S. interest rates still so near zero, the standard monetary policy tool of lowering rates is also unlikely to work. Other options, such as the direct lending programs used during the 2008 crisis, might stretch the Fed's legal authority.
"There are limits to what monetary policy can do," said John Cochrane, a senior fellow at the Hoover Institution at Stanford University. "There is a world market pushing for lower interest rates that is very hard for the Fed to fight."
It is still too early for the Fed to declare defeat though, said David Stockton, the Fed's former research director and now a fellow at the Peterson Institute for International Economics.
The Fed's next monetary policy meeting will be held on March 15-16 when policymakers issue fresh economic forecasts and Yellen holds a press conference.
(Newsmax wire services contributed to this report).
© 2023 Newsmax Finance. All rights reserved.