Was the Federal Reserve actually considering imposing negative interest rates? Apparently so, according to Chicago Fed Bank President Charles Evans, who spoke in front of an audience in London on Wednesday.
Evans explained that central bankers mulled over the idea because of the events currently unfolding in Europe where the European Central Bank (ECB) is employing its own version of quantitative easing (QE).
Here is Evans’s complete statement regarding the matter:
“Let’s be honest, the only reason we are entertaining that is because of current events like the ECB employing QE and everyone else around them struggling with relative monetary issues. In the US we have a different situation.”
Central banks have imposed negative rates in order to spur borrowing and economic growth. Earlier this year, both Denmark and Sweden instituted negative rates, which meant depositors would pay banks to store their money. The ECB, as part of its stimulus efforts, also implemented negative rates late last year.
In his prepared remarks, Evans further commented on how low inflation may make any type of increase in the benchmark rate rather risky. Instead, Evans believes the United States central bank should only raise rates after 2016 when the Fed reaches its two percent inflation target rate.
“I see no compelling reason for us to be in a hurry to tighten financial conditions until it’s clear that inflation will reach the Fed’s 2 percent target within one or two years,” Evans said in London on Wednesday. “Economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.” he said.
Evans added that inflation would rise at a “woefully gradual pace” and wouldn’t reach the targeted two percent until 2018. This is caused by a stronger greenback, says Evans, who noted that it has grown in value 23 percent against major currencies.
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