A top official with the U.S. Federal Reserve harbors the opinion that getting the U.S. economy back to strong growth could require negative interest rates.
Yi Wen, an economist with the St. Louis Federal Bank says, as many economists dismiss the likelihood of the current record-breaking slump being followed by an equally aggressive recovery. Wen made his remarks in a paper on the St. Louis Fed’s website that achieving that kind of a rebound is necessary and possible.
The key, he said, is using aggressive stimulus even beyond what authorities deployed during the financial crisis, and that could include taking interest rates below zero.
Wen compared the response to two major U.S. economic downturns: the Great Depression and the financial crisis. He found that the use of aggressive fiscal response through President Franklin Delano Roosevelt’s New Deal helped generate a V-shaped recovery after the Depression, while primarily monetary responses like low interest rates and Fed asset purchases during the financial crisis produced an L-shaped recovery in which Gross Domestic Product failed to reach potential.
Wen said the combination of policies will be needed so the U.S. can generate an S-shaped pattern, in which growth starts slowly and then quickly bursts higher. Without it, “the economic consequences of the coronavirus pandemic will be permanent,” he wrote.