September 6, 2018 / 10:32 PM / 12 days ago

UPDATE 1-Fed's Rosengren calls for better ammunition for economic downturns

(Recasts lead; adds details from paper, context)

By Ann Saphir and Howard Schneider

SAN FRANCISCO/BOSTON, Sept 6 (Reuters) - U.S. fiscal and monetary policymakers are not adequately fortified to battle a future economic downturn and need to do more to prepare, according to research by a Federal Reserve regional president that suggests that the U.S. central bank needs support from fiscal policymakers to be effective.

Existing policy buffers, including fiscal, monetary and banking regulations, “may not be sufficient to offset future shocks, reducing the capacity available to policymakers to insulate the economy from future adverse shocks,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in the paper, which is to be presented at a conference this weekend.

“More attention should be given to establishing appropriate policy buffers to mitigate future shocks,” Rosengren and his co-authors said.

Rosengren’s argument would mark a substantial departure in how the United States conducts its overall economic policy, implying a degree of coordination among the Fed, fiscal policymakers and state officials in preparing for the next recession.

Fed policymakers frequently complained during the financial crisis that they were “the only game in town,” creating policy on the fly to keep the U.S. economy stable while elected leaders often clashed over budgets and spending, and at key points made decisions that the Fed felt hampered the recovery.

More recently, Fed policymakers have questioned the wisdom of adding to the national debt and depleting fiscal flexibility through the tax cuts and government spending increases under the Trump administration, despite full employment and a growing economy.

With interest rates likely to remain closer to zero than in the past, due in large part to slower population growth and sluggish gains in productivity, the Fed has less room to cut rates to fight a recession.

The Fed either needs to build a “larger monetary policy buffer” or be more willing to use its non-traditional tools like bond-buying more aggressively, the paper said. But, Rosengren said, “These tools have proven to be politically controversial, making their aggressive deployment, or even their deployment at all, less certain in response to a future economic downturn.”

So other policymakers also must step up, he wrote.

States facing deeper crises – Rosengren uses the example of a tourism-dependent state cratering as consumers cut back on spending – might respond more forcefully than those whose main industries are not as affected.

Rosengren in the paper also put in a plug for triggering a countercyclical capital buffer for larger banks, which would require them to set aside more capital now when the economy is strong to create greater protection against a future recession. The issue has divided Fed officials, with some wanting to impose the buffer as a precautionary step now, and others feeling that the financial system is not showing any evidence of risk that would warrant it. (Reporting by Ann Saphir Editing by Leslie Adler)

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