Must-Read: Jared Bernstein: Will the Federal Reserve really have what it takes to fight off the next recession?

Must-Read: No. It will not. It would have had to shift its inflation target up to 3% or 4%/year–and then met that target–in order to have what it takes to fight the next recession. Its failure to recognize that will in all likelihood be judged very harshly by future monetary historians:

Jared Bernstein: Will the Federal Reserve really have what it takes to fight off the next recession?: “Someone called me the other day all wound up because some market prognosticator convinced her that a U.S. recession was right around the corner…

…I think I talked her down on that point…. But I think I did succeed in getting her equally nervous about a different point: There is, of course, a recession out there somewhere. The problem isn’t that we don’t know where; it’s that we’re not ready for it…. The main countercyclical tool at the Fed’s disposal is the interest rate they control, the federal funds rate (FFR), a benchmark for borrowing costs throughout the economy. Historically, as Reifschneider’s Table 1 shows, they lowered it an average of around five percentage points in past recessions. Well, right now the FFR is sitting at less than half-a-percent, which gives them very little room to cut. That’s the limited firepower problem and it’s the topic of Reifschneider’s paper. He argues that this concern may be overblown…. I hope Reifschneider’s optimistic scenarios are correct. But I fear they’re not and we’d be crazy not to have a Plan B.