All over the world, there are central banks that are embracing negative interest rates. In an effort to spur economic growth, encourage spending and stimulate lending, jurisdictions have implemented subzero rates to accomplish that goal.
So far these initiatives have failed (SEE: Central banks’ negative interest rate policies are already backfiring), but don’t tell that to one Fed official.
Speaking in an interview with Bloomberg News on Tuesday, Federal Reserve Vice Chair Stanley Fischer believes negative rates have actually been “quite successful.” He confirmed that the United States central bank doesn’t intend to “do anything in that direction.”
“We’re in a world where they seem to work,” Fischer said.
Fischer conceded that an environment of negative rates is something “difficult to deal with” for savers. However, he explained that these same savers can “go along with quite decent equity prices.”
The former Bank of Israel governor averred that the decisions being made by foreign central banks tend to affect the policies put into place by the Fed.
“We’re dealing with interconnectedness, and we are probably the most important of the central banks, but the European Central Bank is operating in about the same level of GDP, and what it does matters a great deal,” Fischer said.
Late last year, Fed Chair Janet Yellen told the House of Representatives that the central bank would consider negative rates if the economy collapsed (SEE: Yikes! Janet Yellen would consider negative interest rates if economy collapses).
“Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the U.S. context,” Yellen told a House of Representatives committee.
As legendary free market economist Walter Block explains, the real rate of interest can never be negative.
“A basic principle of Austrian economics is that the originary rate of interest (the rate of discount of future goods compared to present, otherwise identical, goods) can never be negative. The reason for this arises not because capital is productive, nor out of man’s psychology. Nevertheless, in spite of the foregoing, there are many benighted souls who insist upon the possibility of a negative rate of originary interest. They are continually discovering cases which “prove” their conclusion. The number of such examples has reached such proportions that it seems advisable to take account of them in a systematic way. Accordingly, this paper is devoted to classifying them in a manner that makes the most intuitive sense: in accordance with the economic errors which are necessarily committed in their very statements”
With a tsunami of inflation heading the way of the U.S., it may be unlikely that the Fed will slash rates to negative territory. But if Fischer thinks subzero rates are working then who knows what else the Fed is capable of?
At least one central banker thinks negative rates are a disaster: Bank of England Governor Mark Carney, who said, “What we’ve seen in other countries is, to be honest, they’ve got this a bit wrong.”
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