Negative rates have not worked for the ECB, Sweden, Japan, or Switzerland. Nonetheless, Fed Chair Janet Yellen is back on that idea today in Congressional testimony. Specifically, Yellen Says Fed Evaluating Possibility of Negative Rates in US.
“We had previously considered them and decided that they would not work well to foster accommodation back in 2010,” Yellen said Thursday, answering questions during a second day of testimony before Congress. “In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation.”
A 2010 Fed staff memo posted on the central bank’s website late last month showed Fed economists grappled with a number of issues related to implementation of negative rates at the time, including possible legal obstacles. Yellen said Thursday that negative rates might be legal, but the question remained open to further examination.
“I am not aware of any legal restriction that would mean that we could not establish negative rates, but I will say that we have not looked carefully at the legal side of this,” Yellen said Thursday.
“We haven’t finished that evaluation,” Yellen said. “We need to consider the U.S. institutional context and whether they would work well here. It’s not automatic. There are a number of things to consider. So I wouldn’t take those off the table, but we would have work to do to judge whether they would be workable here.”
Negative Interest Rate Club
- Eurozone: European Central Bank (ECB)
- Switzerland: Swiss National Bank (SNB)
- Sweden: Swedish National Bank (Riksbank)
- Denmark: Danish National Bank (Nationalbanken)
- Japan: Bank of Japan (BoJ)
Low Rates and Asset Bubbles
Low interest rates foster economic bubbles. Those bubbles always do two things.
- Get bigger than anyone expects
- Burst
When economic bubbles burst, asset deflation sets in. And it’s asset deflation not CPI deflation that central banks ought to fear.
For discussion please see Historical Perspective on CPI Deflations: How Damaging are They?
The Fed (central banks in general) blew another set of asset bubbles that are popping left and right before our eyes, starting with junk bonds in the energy sector. Bank stocks and European peripheral bonds are also under attack.
Now, central banks are clueless as to what to do. Their only answer has been to cut rates to negative territory. That tactic hasn’t worked, and it won’t. But it has fueled a nice rally in gold and precious metal miners.
Mike “Mish” Shedlock
If the want inflation why not just print money and send it to people?
The money would created without debt and people would spend it or pay debt.
They can start with $100 a month to everybody above 18 years old.
When they go NIRP make a B Line to the ATM before it’s empty!
…..BUT…..don’t spend it…….
Seems counter intuitive but Yellen needs to raise rates and let deflation, lower stock markets and rising yields do their thing. Otherwise, the pressure cooker is going to blow sky high leaving us with an out of control catastrophe.
Raise rates, let the Yuan, Yen and Euro devalue against the dollar. In other words, let the world devalue against the dollar making imports cheap in the US. We are after all the largest consumer nation on the planet and we need greater purchasing power from stagnant wages.
This gives us time to reform the financial system like it should have been done 8 years ago.
Reform of the financial system means the lenders to the biggest borrowers feel the brunt of the pain. The biggest borrower is the federal government, so you can bet that any reform that takes place happens only after Uncle Sam gets his immunity.
Uncle Sam creates the money and writes the rules. Uncle Sam always gets immunity.
“This gives us time to reform the financial system like it should have been done 8 years ago.”
It is the lack of time that will result in reform. Reform will come when they have no choice. Japan has had 25 years to reform and still has not done so. The status maintains the quo.
Reform – reform is everywhere since whenever .
Reform is endless intervention for endless intervention because of endless intervention .
Reform is for yesterday , for tomorrow , for you , for us , because how does does does us differently every time .
Reform , the end is nigh !
Reform , the president is high !
Reform … mefor …. more !
rickdaoust, Yes raising rates will do those things plus it will clear out entire industries currently cluttered up with a lot of malinvestment that came about from a lot of cheap money laying around without anything productive to do with it.
Businesses capable of actual growth start to grow again. Pricing power gets restored to the properly productive company, whilst the malinvested wannabe business gets “their” credit taken away.
Rising rates as a remedy? Yes, but TPTB will never accept it.
Who gets the helicopter contract for the cash drop? Money from heaven….
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If she does the negative interest rates, the rest of my money wil come out of the bank and be invested. This country is run by morons!
Right before everyone thinks they go negative they will begin raising rates. At that point in time the markets will have a collective flip the script moment. Europe will essentially go illiquid and the concessions they give up for swap lines will be monumental. Cognitive dissonance of financial market decoupling from each other will be fun to watch
Mish predicted that Gold was a good investment a year ago when “experts” said no. Mish has BS detector. Sometimes it takes a while but the house built on SAND will fall.
Negative interest rates are good a way as any to debauch a currency.
The FED should keep rates positive to get the most stimulus effect. Depositors in countries with negative rates will transfer their money to the US. The FED won’t have to expand its portfolio with another QE when the rest of the world will stimulate for them, AND take the losses when deflation finally crushes debt in the US.
What happens to floating rate loans tied to prime when interest rates go negative? I guess banks paying borrowers would be pretty stimulative.