Fed faces new trade-offs, hunts for new model, in low-rate world

An unprecedented combination of low U.S. unemployment, weak inflation and low interest rates has the U.S. Federal Reserve grappling with how to fight the next recession, as experts debate new approaches to financial regulation as well as a fuller overhaul of Fed strategy. At a three-day conference in San Diego on an array of economic topics, one stood out: The textbook view of central banking, where low unemployment produces unwanted inflation that monetary policymakers can counter with interest-rate hikes, is at least badly hobbled if not fully broken. Not only are low unemployment and weak inflation co-existing but global interest rates are stuck at such low levels, and are considered so unlikely to rise, that the Fed and other central banks may enter the next recession with little room to cut rates before hitting zero and having to decide on other strategies.

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