No Fed firepower - the big future concern

"No firepower"
"Ocean liner without life boats"
"out of ammo"
"monetary policy may be more frequently constrained"
"more limited than usual, but they're not zero by any means"

-Words to describe Fed and its ability to deal  with next recession

One of the chief concerns of money managers who look into the distant future (for money management that can be out over a year) is the fear that the Fed does not have any firepower to mollify the next recession. There is no good words to describe this problem, so we use these military analogies. This is a policy problem that will have real effects on asset markets.

Given all of the monetary stimulus, the Fed has not been able to push up long-term growth. It was very good as solving the initial liquidity crisis, but the cost has been to push up asset prices and create a wealth effect that actually increased income inequality. Now there are limited alternatives. If asset prices decline from a turn in the business cycle, there will not be the ability to lower borrowing costs. Direct purchases of Treasuries will increase bank reserves but there already is an excess of bank reserves. The direct purchase of assets is another alternative which opens a different set of issues with risk shifting from markets to the Fed balance sheet.

Assume we have a more classic business cycle with excess inventories and a need for production declines to gain equilibrium. Central bank tools will be limited. Firms and individuals will have to look to fiscal stimulus or just learn to live through the downturn. The discount rate change will not be able to offset the declines in earnings. This will be new uncharted environment.