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From this plot, it seems that every time there is a recession, the Federal Reserve Bank cuts interest rates. This is because money circulation slowing down will lead to a downward spiral and lower interest rates act against that.

Real GDP growth vs Federal Funds Rate

The 1973 stagflation can be considered an exception due a number of reasons including Nixon interfering with monetary policy and Regulation Q. But given that these events much less likely in the 2020s, is there a scenario in this age where a recession happens and the Federal Reserve Bank is unable to cut rates due to stubborn inflation? If so, how could this scenario play out?

I know that this is possible in less developed economies and so my question is restricted to large developed economies like the US.

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  • $\begingroup$ I thought there was a point recently where rates were very low and bonds went negative and there was no good way to correct it? We ran out of room to cut rates? Then it got better somehow. $\endgroup$
    – Scott Rowe
    Commented Mar 17 at 2:50

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