Yesterday’s release of the Beige Book survey from the Federal Reserve paints an upbeat profile, advising that the “the economy expanded at a modest pace through the end of August.” But gathering storm clouds suggest that the rest of the year could bring rougher seas, raising doubts about how the central bank will navigate a slowing economy.

The Fed finds itself in a dilemma with no precedent in modern times. After cutting interest rates to nearly zero for years after the Great Recession, the central bank has managed a degree of normalization lately by lifting rates. But the tide seems to have turned this summer as the Fed target rate was cut in the face of softer economic data. Federal Reserve Chairman Jerome Powell called it a “mid-cycle adjustment,” but the change was widely seen as the first of several reductions to counter a downshifting economy.

Fed funds futures are pricing in a near certainty that the central bank will cut rates again at the September 18 FOMC meeting. Meanwhile, the outlook for economic growth in the upcoming third-quarter GDP report anticipates another downgrade to a sluggish 1.5% increase, according to yesterday’s revised nowcast via the Atlanta Fed’s GDPNow model.

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The current target rate is 2.0%-2.25%, leaving little room to fight the next recession using the standard policy tool: reducing the price of money. If an economic downturn started today, the current Fed funds rate would rank as the lowest in the post-World War Two era at the start of a recession.

The central bank has other policy tools at its disposal, of course, including quantitative easing (QE) – buying securities to reduce longer-term interest rates in a bid to boost lending and consumption and thereby strengthen economic growth. The Fed has used QE extensively in the past decade, with mixed results. The question is how a new QE program would fare with interest rates already low by historical standards?

The harshest critics say that QE has been a failure and that rolling out the policy yet again to fight the next recession will deliver even weaker results. Because monetary policy was never fully normalized after the last recession, a new stimulus program will struggle to find traction in the real economy – the pushing-on-a-string challenge.

Meantime, market forces continue to drive interest rates down, effectively delivering a QE via the crowd’s collective trades. The 10-year Treasury yield is 1.47%, close to a record low and the 30-year Treasury rate has fallen below 2.0% for the first time.

Although US rates continue to slide, the price of money remains high relative to the rest of the world, where negative interest rates are becoming the norm. Will the US see sub-zero yields at some point? Yes, predicts former Fed Chairman Alan Greenspan. It’s “only a matter of time,” he told CNBC on Wednesday.

The market pressure is certainly strong in calling for even lower rates from current levels, a force that the Fed will find increasingly difficult to ignore. The inverted yield curve is one factor. Short rates are now above long rates–a condition that’s widely seen as a harbinger of recession in the months ahead. A 3-month Treasury Bill, for instance, is currently 1.97%–well above the 10-year’s 1.47%, based on Treasury.gov data for Sep. 4.

Meantime, the Treasury market continues to cut its implied inflation forecast. The yield spread on the 5-year nominal Treasury less its inflation-indexed counterpart is roughly 1.30%. A year ago, it was over 2.0%.

If negative interest rates are destiny for the US, a growing chorus of analysts are warning that the trend is doomed to failure as a stimulus effort for the economy. Sub-zero rates also threaten the stability of the banking industry, as Europe has come to learn with its grand experiment with negative terrain. “It is a remarkable burden for banks who find it more or less impossible to convey this cost to retail savers,” observes Volker Hofmann at the Association of German Banks.

Instability in banking ultimately spills over into the real economy and so the persistence of negative rates can’t be dismissed as someone else’s problem.

But if the US economy is slowing, and at some point faces a recession (as it eventually will), the policy choices for the Fed are unusually ugly. Cutting rates and/or unleashing a new round of QE will likely lead US rates into negative territory at some point. The expected economic stimulus, however, is expected to be light to non-existent.

The growing calls for the Fed to give up its monetary experiment and forgo new stimulus may be compelling on paper, but it’s hard to imagine that the central bank will stand pat, much less tighten policy, if the economy is slipping into a recession. Indeed, political pressure on the Fed is growing, courtesy of President Trump’s continuing calls for rate cuts.

Damned if you do, damned if you don’t. It seems that central bank policy has run out of road. Ill-informed or not, the Fed will likely continue to cut rates and perhaps ease into more QE. Whether or not that delivers the usual economic pop is anyone’s guess. If it doesn’t, the Fed (and the economy) will be in a very strange place with no obvious path forward.

Some economists, however, say the standard analysis is wrong. Scott Sumner, an economist who advocates that the central bank policy should focus on stabilizing nominal GDP growth, thinks a reckoning of sorts is coming:

The next financial crisis is likely to occur in an environment of low interest rates. But it won’t be caused by low interest rates; it will be caused by the things that cause low interest rates. And for the most part that is not monetary stimulus.

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