Harvard economist Martin Feldstein predicts the U.S. is headed for a long, deep recession as interest rates continue to rise, making share prices less attractive to investors and sparking a market plunge.
“U.S. long-term interest rates to continue to rise. But, in all likelihood, short-term rates will not increase fast enough to give the Federal Reserve sufficient room for monetary stimulus before the next economic downturn begins,” he wrote in a piece for Project Syndicate.
“If a recession begins as soon as 2020, the Fed will not be in a position to reduce the federal funds rate significantly. Indeed, the Fed now projects the federal funds rate at the end of 2020 to be less than 3.5%. In that case, monetary policy would be unable to combat an economic downturn,” he said.
“The alternative is to rely on fiscal stimulus, achieved by cutting taxes or increasing spending. But with annual budget deficits of $1 trillion and government debt heading toward 100% of GDP, a stimulus package would be politically difficult to enact,” he said.
“As a result, the next economic downturn is likely to be deeper and longer than would otherwise be the case.”
Feldstein isn't alone in his warnings about the economy.
A recent S&P Global Ratings report said while U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession.
Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, Reuters reported, citing the report.
In addition to lacking reserves, states at risk of severe financial stress in the first year of the next recession also have higher revenue volatility and elevated fixed costs, including debt payments and pension contributions, S&P said.
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