No easy way for the Fed to reverse course

Fri, December 18, 2015

Financial Times

The Federal Reserve has just embarked on its first interest rate-raising cycle for a decade, but that does not mean it is too soon to think about how it would resuscitate the economy if a new recession unexpectedly struck.

...Lou Crandall, chief economist at Wrightson ICAP, said the strategy was logical. The Fed has “two dimensions along which it can tighten,” he said — one by allowing its balance sheet to shrink as assets mature and run off, and one by lifting rates.

If the US economy stalls, it would be simpler for the Fed to cut rates back than to restart asset purchases to bulk up its balance sheet. “Politically it is much harder to start [Quantitative Easing] again,” he said.