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Negative Interest Rates are Possibly Coming to the US

Negative interest rates could be on their way to the US. As global economy is slowing down in the conditions of near zero interest rates, the expansion quantitative easing by central banks causes the interest rates fall into negative territory. The Bank of Japan recently set the negative interest rates at -0.1%. The European Central Bank is keeping negative interest rates since the middle of 2013 and is considering lowering it from the current -0.3%.

The Federal Reserve Interest rates were kept near zero since 2008 until last December, when the decision to bring the benchmark rate up to 0.4% was made. The Fed is currently claims that it will stick with the higher rates in fear that quick reversing of the course may hurt credibility of their decision process. Nevertheless, if signs of economic slowdown are detected, the Fed does not exclude possibility of an additional stimulus, including lowering of the interest rates, possibly in subzero territory. As USA Today reports:

“Federal Reserve Chair Janet Yellen told Congress Thursday the central bank has not ruled out imposing negative interest rates if the economy takes a downward turn but is investigating their viability.

“I wouldn’t take them off the table but we would have work to do to make sure they would be workable,” she told the Senate Banking Committee in her semiannual monetary policy report to Congress. Yellen testified before the House Financial Services committee Wednesday…

Still, Yellen said Thursday she doesn’t expect the economy to wobble enough to warrant a cut in interest rates, let alone a drop into negative territory.”

Former Minneapolis Fed President Narayana Kocherlakota favors low interest rates, considering them as a good environment for issuing more debt that public wants to buy at premium prices and use this debt to invest in public infrastructure:

“The former Fed uber dove argues that the government should take advantage of the worldwide flight to the safety of U.S. bonds to do much more government spending on things like safer water, nuclear power plants, and bridges…

“The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the U.S. government,” Kocherlakota says, adding, “Yes, there is already a lot of that debt out there – but its high price is a clear signal that still more should be issued. The government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.”…

In his blog post, Kocherlakota adds: “Such a move would be appropriate for three reasons: It would facilitate a more rapid return of inflation to target; it would help reduce labor market slack more rapidly; and it would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations.”

The following is his opinion on negative interest rates:

“Negative Rates: A Gigantic Fiscal Policy Failure,” Kocherlakota says:  “Going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.”

Market watchers believed it was Kocherlakota who plugged in negative rates on the central bank’s heavily followed “dot plot.” The dot plot shows anonymously where each Fed member thinks the fed funds rate will be at the end of the next two years and long-term. Kocherlakota effectively confesses in his latest column that, yes, “since October 2015, I’ve argued that the Federal Open Market Committee (FOMC) should reduce the target range for the fed funds rate below zero.”

It is easy to explain fiscal actions by theoretical arguments. But someone has to be responsible for the results of those actions. Issuing more federal debt to pile upon already existing $19 trillion just for bringing up the current inflation figures by a fraction of a percent does not sound as a bright proposal, even if it comes from a former employee. Unfortunately, this kind of thinking, which favors simple academic solutions over more difficult practical ones, is typical for the ruling academic intellectual elite.

See also:

Chilled by sub-zero rates, investors urge central bank rethink

Yellen: Negative rates not “off the table”

The danger of negative interest rates

Former Fed President Urges Negative Interest Rates