A crop of fresh ideas along with coordinated monetary and fiscal policies will be needed to combat the next global recession, according to reports from the BlackRock Investment Institute and Insight Investment, a boutique investment firm owned by BNY Mellon.
“There is not enough monetary policy space to deal with the next downturn,” according to the BlackRock report, “Dealing with the Next Downturn,” whose authors include former Federal Reserve Vice Chair Stanley Fischer, a former chairman of the Swiss National Bank and a former deputy governor of the Bank of Canada — all now associated with the institute.
That’s because global interest rates are either extremely low, as in the U.S., or negative, as in many European countries including Germany and France.
“This channel is almost tapped out,” according to the according to the BlackRock report, referring to monetary policy, noting that one-third of developed market government and investment-grade bonds currently have negative yields.
The low and negative rates correspond to lower-than-expected inflation here and abroad. In the U.S., for example, the personal consumption expenditures index, excluding food and energy — the Fed’s preferred inflation indicator — has failed to reach the Fed’s 2% target since December 2018 and has been fluctuating between 1.5% and 1.8% on a monthly basis ever since.
Still, the U.S. has more flexibility to lower rates than Europe or Japan because it hasn’t moved to negative rates, though the federal funds rate, in a range of 2%-2.25%, doesn’t leave much room for cuts unless negative interest rates are adopted, which would raise legal questions, according to Insight Investment’s white paper, Policy Options in the Next Downturn.