What happens when the Fed has no more ammo to combat a recession?

by LuxGang

 

“1989: the rate was at nearly 10% when the yield inverted in March 1989. Between that time and March 1991, the rate dropped to approximately 6% and continued to drop to approximately 3% where it stayed until March 1993.

2000: The rate was around 6% in April 2000. By September 2002, it was at approximately 1.7% and continued to drop to under 1% til April 2004.

2006: The rate was around 4.5% in January 2006. Rates would continue to rise to approximately 5.25% in July 2007 and drop to zero or near zero rate and hold those rates until 2015 before it started to rise.

Our current rate is between 2.25% and 2.5% and the Feds are already pressured to not raise the rates in the near term. If a recession hits, we have basically exhausted the Feds lowering rates as a tool to spark economic recovery.”

This is quite a disturbing trend, and if it continues, eventually we’ll be at 0% interest rates in the middle of a massive recession. Then what?

  • The Fed prints money to reflate the economy and bring back liquidity?
  • Is the possibility of hyper inflation or even stagflation a reality we could be facing?
  • Could we be running into a “lost decade” like Japan did, or are demographics too different for that to happen in North America?

This is a scary time to be an investor. My only solace is knowing the market has been through way worse and recovered. The difference this time though is our historically low interest rates. Not sure if we’ve ran into this problem before and how it was overcome if we did.

These are questions I’ve been asking myself, and I’m not smart enough to know the answer. Hope someone here knows enough about economics and the stock market to provide some clarity on what we might experience in the next 2 years if we continue down this path.

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