A mild US recession could drive both short- and longer-term Treasury yields close to zero, limiting the central bank’s ability to stimulate the economy and bringing US experience closer to that seen in Europe and Japan, Michael Kiley, a deputy director in the Fed Board’s financial stability unit said Wednesday, according to Bloomberg.
The Fed’s overnight policy rate was cut to almost zero in 2008 and held there until 2015, but longer duration bond yields remained well above that level.
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Research suggests that zero rates would be hit for “maturities from one-day to seven or ten years.
These scenarios highlight the possibility that a recession in the United States would bring nominal interest rates to unprecedented levels, potentially implying limits on the ability of monetary policy to support recovery.
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