The Federal Reserve may not be implementing negative interest rates anytime soon, but the United States central bank is not taking subzero rates off the table, says Fed Chair Janet Yellen.
Speaking in front of the House of Representatives on Wednesday, Yellen told lawmakers that recession fears could come to fruition as she suspects a “chance” of an economic downturn in the near future. Meanwhile, Yellen talked about subzero rates and how the central bank is studying how negative rates would help ease a declining economy.
When asked if the Federal Open Market Committee (FOMC) is entertaining the idea of negative rates, Yellen replied that the door is always open and the tool wouldn’t be taken off the table. She added that the FOMC had considered negative rates in 2010, but turned down the idea.
“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 would need (to increase) accommodation. We haven’t finished that evaluation. We need to consider the institutional context and whether they would work well here. It’s not automatic,” she said.
Yellen added: “We wouldn’t take those off the table, but we have work to do to judge whether they would be workable here.”
It should be noted that one Fed member conceded that the central bank also debated embarking upon negative rates prior to the European Central Bank’s (ECB) decision to enter that uncharted territory in 2014. Chicago Fed Bank President Charles Evans told a London audience early last year that the concept was talked about because the events unfolding in Europe.
“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,” Evans said.
The Fed announced earlier this month that as part of its annual stress test, it would prepare U.S. banks for potential subzero rates. The test would see the rate on the three-month U.S. Treasury bill hitting below the zero mark for an extended period of time. During this test, the unemployment rate rises to 10 percent.
“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in an announcement of the stress tests.
Many doubt if subzero rates would be effective enough to help the stock market or broader economy. But the entire purpose of negative rates is to improve stock valuations and spur spending. Interest rates manipulated by the Fed allocate funds into the cpaital goods sector (stocks).
Remember, the real rate of interest can never, ever touch negative territory.
Paul-Martin Foss of the Mises Institute opines:
“What we can’t forget is that the real rate of interest can never be negative. The real, or natural, rate of interest is a function of the preference for present goods over future goods. A bird in the hand is worth two in the bush, in other words. A negative natural rate of interest would mean that someone prefers less in the future to more in the present. Given the choice between $20 today and $10 tomorrow, you would prefer the $10 tomorrow. That is a complete absurdity that would never happen in reality. But when you realize that most of the assumptions made by mainstream economists in creating their models are absurd, unrealistic, and nonsensical, you can understand at least a little why those practitioners of voodoo mathematics think that negative interest rates are a potential policy tool.”
Central banks overseas haven’t been deterred as they have imposed negative rates (SEE: Will negative interest rates dominate monetary policy in 2016?): the Bank of Japan (BOJ), the European Central Bank (ECB), the Swiss National Bank (SNB), the Riksbank in Sweden and the Dansmark National Bank in Denmark. Even the Bank of Canada (BoC) confirmed that the door is open to the possibility of installing negative rates.
Consumers ultimately suffer from subzero rates because not only do they witness their savings affected by inflation, their cash deposits deteriorate because banks charge you just to hold your money.
What an interesting world we live in today.
Jim Rogers is right. Central banks have lost control of the markets, if they ever had any control to begin with.
–AM
As the “central banks” lead the world in to a recession / depression; one has to ask, Who Benefits?
The People need to counter this by going back to using cash as much as possible and starting a secondary economy based on barter of goods and services. That is a hedge that can not be countered or manipulated by the banks.
Preserving any form of wealth in precious metals gives the individual the ability to counter any future “negatives”, as does the ability to sustain ones self for a protracted time period.