Financial markets want subzero interest rates?
Well, the fine folks at Bloomberg are at it again, promoting the idea that the U.S. economy needs negative rates to survive the coronavirus pandemic.
Recently, Former Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said that the U.S. central bank has no reason not to brings rates into subzero territory.
And now celebrated investor Mohamed El-Erian writes that the market is requesting negative rates. He opined:
Yet three distinct drivers are pushing markets to press the Fed to take rates negative: the significant deterioration in economic data, including this week’s distressing jobs indicators; a desire to validate elevated stock prices that are notably decoupled from fundamentals; and the hope that if they can’t get negative rates they will get more credit easing instead. It is also another example of markets pressing for exceptional Fed support directly after an unanticipated policy easing.
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Now the markets are starting to press for negative interest rates, an outcome that would make risk assets more attractive in two ways: through net-present-value effects that benefit valuations and by pushing more money out of government bonds and cash and into riskier bonds and stocks.
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Markets that have been conditioned to think of the Fed as their BFF, quickly incorporate a positive central bank surprise and then ask for additional easing. And the more they do so, the greater the dilemma for the Fed: Either get pushed around more by the markets and deepen the moral hazard, or resist and risk disruptive financial volatility, such as the 2013 Taper Tantrum and the dislocations at the end of 2018 that forced the Fed into a policy U-turn.
With the economy under such pressure, the continued co-option of the Fed by markets risks fueling more criticism that the central bank cares much more about Wall Street than Main Street and much more about the rich, who disproportionately own financial assets, than the less-fortunate segments of society.
It will only be a matter of time before the Eccles Building adopts a NIRP, but it probably will not be until the next recession. This is probably going to be the policy of last resort for the next economic collapse.
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