Even after the Fed begins to ease monetary policy through rate cuts, the impact on the economy will be limited for several reasons, according to Shilling:

The Fed has less than half the room to cut rates than the 500 basis points it typically has when addressing recessions. The federal funds rate is currently 2.25%-2.5%. As a result, the Fed "may slash rates sooner and in bigger increments," writes Shilling, suggesting at least a 50 basis-point cut rather than the usual 25 basis points.
Quantitative easing, which the Fed used during the Great Recession and could use again for the next recession, has limited impact on the economy. During the Great Recession it bid up stocks, rather than spending and investments, writes Shilling.
Cyclical industries such as construction and manufacturing, which are the sectors most susceptible to credit easing policies, account for a much smaller part of the U.S. economy than they did historically — now just 13% of U.S. jobs compared with 25% in 1980.
The U.S. consumer, who is the main driver of the U.S. economy, is already spending less due to a decline in personal spending and is more likely to save than borrow when rates decline because of current relatively high levels of household debt.

"In effect the Fed had little ammunition to fight a recession so federal efforts will shift to fiscal stimuli," writes Shilling. "Infrastructure stimuli may be emphasized," he writes, since both political parties seem to favor such spending.

Instant Insights /

Gary Shilling: The Recession May Have Already Begun

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