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IPFS News Link • Federal Reserve

Negative interest rates could be needed for a 'V' recovery, Fed economist says

•, Jeff Cox

As many economists dismiss the likelihood of the current record-breaking slump being followed by an equally aggressive recovery, central bank economist Yi Wen said 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 GDP failed to reach potential.