September 13, 2019
Not satisfied with the Federal Reserve’s pace in cutting the federal funds rate, President Donald Trump now wants the Fed to bring rates lower than low. That is, to adopt the negative interest rate policy that some other central banks have implemented.
“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” Trump tweeted. “INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.
“We have the great currency, power, and balance sheet,” he added. “The USA should always be paying the … lowest rate. No Inflation!”
What exactly is a negative interest rate, and how does it work? Under a negative rate fiscal policy, financial institutions are required to pay interest for parking excess reserves with the central bank. The idea is that central banks penalize financial institutions for holding on to cash in the hope of prompting them to boost lending.
In 2014, the European Central Bank (ECB) introduced negative rates, lowering its deposit rate to -0.1% to stimulate the economy. Reuters reported that given rising economic risks, markets expect the ECB to cut the deposit rate, now at -0.4%, in September.
At the other side of the world, the Bank of Japan (BOJ) adopted negative rates in January 2016, primarily to keep off an unwelcome yen spike from hurting an export-reliant economy. Japan’s central bank charges 0.1% interest on a portion of excess reserves that financial institutions place with the BOJ.
The long-term implications? UBS’ Huw Van Stennis told CNBC that they’re difficult to judge, partly because little research has been conducted into negative interest rates. “We haven’t gone through this ‘Alice in the Looking Glass’-type territory before,” he said.
Looking specifically at the eurozone, where 70% of lending to businesses occurs through banks, Van Stennis expressed concern that a negative rate policy could eventually do more harm than good. “It’s like taking steroids: they’re great in short dosages, but long-term usage starts to weaken your bones,” he said.
Domestically, financial analysts polled by Reuters also urged caution over a negative interest-rate environment, in view of a still-strong U.S. economy and low unemployment.
“I think a lot of the experience you’re seeing out of the ECB and Japan is that sure, interest rates can go negative, you can force rates to go negative, but it doesn’t mean that whatever economic benefit there may be is worth the costs to financial intermediation and stability,” said BMO Capital Markets’ Jon Hill in New York.
At Charles Schwab in Austin, VP Randy Frederick told Reuters, “Certainly the economy at the moment does not justify such a move. You can argue that negative interest rates have not had the intended effect” desired by the countries that have implemented such a policy.
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