NEW YORK/LOS ANGELES (Reuters) – Federal Reserve policymakers are fretting that they could face the next U.S. recession with an arsenal of policies little different from that used in the last downturn but robbed of much of their punch because interest rates are still low.
In the midst of an unprecedented leadership transition, Fed officials are publicly debating how to prepare for the next downturn. Should they scrap their approach to inflation targeting? How big of a balance sheet should they retain? How much further can they raise interest rates and still keep the economy on a growth path?
All this comes against a backdrop of an unexpectedly large boost from tax cuts and government spending that will drive up deficits, leaving less room for a fiscal rescue in the next recession.