[R-G] Paul Krugman: Does the Fed Have Enough Ammunition?

[Yoshie Furuhashi]

<http://krugman.blogs.nytimes.com/2008/01/23/does-the-fed-have-enough-ammunition/>
January 23, 2008,  10:31 am
Does the Fed have enough ammunition?

Barry Ritholtz says
<http://bigpicture.typepad.com/comments/2008/01/is-the-fed-a-pa.html>:

     Thank goodness I have a lot of math, cause thru the clever use
     of differential equations, I can calculate that the Fed has only
     four more Shock and Awe 75 bps cuts, plus a Shock (but no Awe)
     50 bp left.

Seriously, does the Fed have enough ammunition? History gives us at
least some reason to worry.

As I've pointed out before, the last two recessions were followed by
prolonged "jobless recoveries" that felt like continuing recessions:

Two Recessions
<http://www.princeton.edu/~pkrugman/two-recessions.png>

Each time, the Fed ended up cutting the Fed funds rate — the overnight
interbank interest rate — by a lot: more than 6 1/2 percentage points
in response to the 1990-91 recession, 5 1/2 percentage points in
response to the 2001 recession. That second time got scary, because
there was only 1 percentage point left:

Fed Funds Rate
<http://www.princeton.edu/~pkrugman/fed-funds.jpg>

This time we started at 5.5%. If the shock is worse than last time —
which certainly seems possible — there is real reason to worry.
--
Yoshie
<http://montages.blogspot.com/>