A key recession warning flashed in the US last month, renewing concerns about the limitations Washington could face in the event of a downturn.
Policymakers typically have a set of go-to tools they can turn to during a recession: easy money, higher spending, and reduced taxes. But with already-low interest rates and a ballooning federal deficit, they may have less room than usual to bolster the economy this time around.
“There are certainly some automatic stabilizers that would kick in like food stamps and Medicaid,” said Austan Goolsbee, who served as the chairman of the White House Council of Economic Advisers following the 2008 financial crisis. “But given that the rest of the world is slowing, too, it seems that policy to fight a recession would be a weaker brew than we might normally hope for.”
Furthermore, trade tensions between the US and China escalated dramatically last month against a backdrop of weaker growth around the globe. Businesses and investors have grown increasingly worried the longest expansion on record could be upended by tariffs, which have raised prices and cast a thick cloud of uncertainty over businesses.
In July, the Federal Reserve pointed to those factors as it lowered interest rates by a quarter percentage point to a target range of between 2% and 2.25%. However, some officials have since emphasized the central bank remained limited in its ability to offset the effects of protectionism.
“While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade,” Fed Chairman Jay Powell said at an annual economic policy symposium in Jackson, Wyoming this August.
‘Toolboxes are somewhat depleted’
The policy-setting Federal Open Market Committee has become divided over whether another rate cut would be appropriate in September. The federal funds rate has remained low by historical standards, particularly with long-term expected inflation factored in.
However, the White House and Congress could face similar restraints following large tax cuts and spending increases passed in recent years. Those policies have put the federal deficit on track to surpass $1 trillion next year, potentially lowering the appetite for further stimulus measures.
Moreover, when the US enters the next recession, debt relative to the size of the economy will be twice as high as in 2008, according to Maya MacGuineas, the president of the Committee for a Responsible Federal Budget.
“That means both monetary policy and fiscal policy, those toolboxes are somewhat depleted, which means fighting the next recession will be much more challenging,” MacGuineas told PBS News Hour in August. “This is an era of just charging everything on the credit card, and it is going to make the economic challenges of the future ever so much more difficult.”
The White House has downplayed concerns about the economy at the same time that it sought efforts to stave off a downturn, including delaying some trade war escalations with China and examining a plan to cut taxes by the amount it has raised in tariffs.