Yves here. The Fed revealing officially that it is opposed to negative interest rates should not come as news, since we’ve been saying that looks to be the case for years and we are hardly the most plugged-in Fed-watchers.
It’s been clear even if no one will admit to it that the central bank recognizes that it drove rates to low too fast and is finding it very hard to normalize (the repo mess is a symptom of that). The Fed has also been signaling its unhappiness with the ECB’s willingness to go into negative interest rate terrain. Nevertheless, it is useful to have the Fed’s point of view more widely known.
By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street
The minutes for the FOMC meeting on October 29-30, released today, shed some light on the laundry list of discussions arising out of the Fed’s current review of monetary policy strategy, where it tries to figure out how to line up the tools to be used during the next crisis, and which tools to line up.
All kinds of tools are being kicked around in addition to the tools used during the last crisis – these potential new tools ranged from “rate caps” on long-term Treasury securities to various repo facilities and negative interest rates.
But one potential tool was rejected by “all participants”: negative interest rates.
And the Fed had a lot to say about negative interest rates and their drawbacks for the US. This is the first time that a detailed discussion of negative interest rates – with pros and cons – were referenced in the minutes – showing how controversial that topic has become among central banks globally. You can essentially see the Fed’s distaste for them in the US.
In the quote below from the minutes, the paragraph divisions and bullet points are mine to make the pathologically long paragraphs of the minutes, which are purposefully designed to not be read by humans, more readable for humans:
The briefing also discussed negative interest rates, a policy option implemented by several foreign central banks. The staff noted that although the evidence so far suggested that this tool had provided accommodation in jurisdictions where it had been employed, there were also indications of possible adverse side effects.
Moreover, differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States.
All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.
- That there was limited scope to bring the policy rate into negative territory,
- That the evidence on the beneficial effects of negative interest rates abroad was mixed,
Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system.
In particular, some participants cautioned that the financial system in the United States is considerably different from those in countries that implemented negative interest rate policies, and that negative rates could have more significant adverse effects on market functioning and financial stability here than abroad.
And then of course there was the backdoor – starts with “notwithstanding” – that any noteworthy central bank always leaves open about anything:
Notwithstanding these considerations, participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool.
And the Fed may not see any need for negative interest rates in the first place. The Financial Crisis was the biggest financial event in my lifetime, and the Fed is fairly happy with how the tools it used at the time dealt with it, according to the minutes, which repeated what the Fed has been saying for years. And this self-back-patting was the conclusion of the negative interest rate discussion:
Overall, participants generally agreed that the forward guidance and balance sheet policies followed by the Federal Reserve after the financial crisis had been effective in providing stimulus at the ELB.
The ELB is the “effective lower bound” on nominal rates. In a Fed discussion paper this year, former Fed Chair Ben Bernanke and two other authors explain what “ELB” means for the United States (underscore mine):
In a low-rate environment, the scope for monetary policy to respond to a slowing economy or unwanted disinflation may be constrained by the effective lower bound (ELB) on nominal rates, which (for the case of the United States, examined here) we take to be zero.”
So here you have it: The spreading distaste for negative interest rates at the Fed add to the spreading distaste for negative interest rates in Europe, where they’re coming under increasingly heavy criticism for the damage that they do, including to the banking system and pension funds, now that Draghi finally rode off into the sunset.
Waiting for “a material reassessment of the economic outlook.” Read… Fed Moves from “Mid-Cycle Adjustment” to Mid-Cycle Wait-and-See: My Fancy-Schmancy “Fed Hawk-o-Meter”
“In particular, some participants cautioned that the financial system in the United States is considerably different from those in countries that implemented negative interest rate policies”
What are the considerable differences that these people are talking about?
I suspect the difference is that Europe has a more equitable economic system and thus its people are not so desperately dependent on welfare proportional to account balance as they are in the US.
But ”more equitable” does not necessarily mean good and the more ideologically-minded USA could put Europe to shame (rather than the reverse, currently) should we ever adopt the proper ideas.
Our banking system is totally privatized and very competitive. But that would mean nothing at NIRP. The real culprit always is congress – they are responsible for fiscal spending. And they do nothing. Maybe the Achilles heel to all of this economic nonsense is pension funds because so many PE groups (who are probably also connected with the big investment banks in inextricable ways) are dependent on using pension fund money to turn a profit, usually by cannibalizing society and business. It’s clearly a situation that cannot continue, so private profits notwithstanding ;-), negative rates might become necessary when pension funds can no longer support both the banksters and the retirees. Which is just about now. In the meantime Congress could save the situation by a private debt jubilee. Which, if you will, is the equivalent of negative rates in a sort of balloon payment. It’s a big mess.
Our banking system is totally privatized and very competitive. But that would mean nothing at NIRP. StO
Banks could still act as loan brokers between other accounts at the Central Bank – once those other accounts are allowed, that is.
And banks might even safely create SOME deposits if they could earn more in interest than they had to pay for reserve storage (negative interest) and also pay the risk-premium to depositors.
But, arguably, if the banks can run their own payment system on top of the fiat system, then the banks are not paying enough for the storage and use of fiat.
The spreading distaste for negative interest rates at the Fed add to the spreading distaste for negative interest rates in Europe, where they’re coming under increasingly heavy criticism for the damage that they do, including to the banking system and pension funds, … Wolf Richter [bold added]
Speaking of distasteful, how distasteful is it to defend welfare* proportional to account balance, i.e. welfare for the rich, by hiding behind alleged concern for widows and orphans? Not that I accuse Wolf, who strikes me as a very decent, honorable man of this – make no mistake.
Also, why should we have only a SINGLE payment system (besides mere physical fiat, coins and paper central bank notes) that MUST work through private banks or not at all?
*That is, if the debt is the inherently risk-free debt of monetary sovereigns or their central banks.
“Speaking of distasteful, how distasteful is it to defend welfare* proportional to account balance, i.e. welfare for the rich, by hiding behind alleged concern for widows and orphans?”
That’s the whole point of being against negative interest rates, or 0 interest rates for that matter.
Why should pension funds rely on interest from sovereign bonds when the sovereign either gets the money from taxes or prints it?
It would be easier for the sovereign to directly pay for retirement, from taxes or by printing.
But we live in a world where people who save and accumulate waelth expect as if it is a natural right that they can get an income from it. This is very much the whole point of capitalism, that you can get a revenue stream from accumulated wealth, after all.
This is very much the whole point of capitalism, that you can get a revenue stream from accumulated wealth, after all. MrMister
Except when the assets are inherently risk-free we don’t have capitalism; we have welfare for the richer at the expense of the poorer, one way or another.
Anyone care to stand up and defend THAT?
Wellllll…. If cynical old me were a card carrying Calvinist, as many upper echelon financial ‘actors’ seem to be today, I would describe that “welfare for the rich” as being Divinely Ordained. In other words, a circular jerk logic. The Rich deserve the Socialism For The Rich because they are the Rich. They are doing ‘G–s Work’ after all.
The Rich deserve the Socialism For The Rich because they are the Rich. They are doing ‘G–s Work’ after all. ambrit
Yes, I’ve encountered that heresy from some loathsome individuals but it’s not Biblical and useless at best wrt salvation.
But I will testify to this: the God of the Bible DOES reward faith, .e.g. I went from $54 dollars in the bank with no prospects to a $40/hr (back in 1996 or so) dream job where I set my own hours and worked with some sharp people I liked doing what I loved. The only real condition (besides wasting time at useless Quality Assurance Meetings, etc) was getting the job done.
Btw, no fan of Calvin but he at least had the decency to say the poor should not be charged ANY interest – unlike the Alabama Southern Baptists who ruled several years ago that payday lenders should content themselves with “ONLY” 36% APR. But that’s “only” 12 (36?) times the interest rate CONDEMNED in Nehemiah 5. Yep, that some reverence for the Bible. NOT!
Correction: make that ”3 (36?) times the interest rate CONDEMNED in Nehemiah 5!”
If I dont get any interest for my savings in the bank, then I also don’t want any inflation eating my savings, which are the product of my labor and prudent consumption.
I think citizen’s accounts at the Fed is a marvelous idea, but how would you defend no interest for no-risk savings in light of inflation consistently diminishing the value of my no-risk savings?
Some have said (Ian Welsh for one) that inflation is desirable because it shifts economic advantage so to speak from the old to the young. I think this is too broad a brush and makes little sense.
Private citizens need the ability to accumulate savings to tide them over between job losses and during retirement. It seems fair to offer them enough interest to make up for inflation as well. Society as a whole is better off when people are able to take care of themselves without resorting to loansharks. The alternative is a robust safety net. Of course, the US has neither. Here the social safety net is for the rich and everyone else can go hang. They should put that on our money.
Some have said (Ian Welsh for one) that inflation is desirable because it shifts economic advantage so to speak from the old to the young. I think this is too broad a brush and makes little sense. deplorado
The money supply should, of course, at least keep up with population growth or the old lazily loot the young via deflation – a despicable situation.
So yes, let’s have SOME price inflation but let’s make sure the money supply increases ethically and that requires that:
1) all fiat creation beyond deficit spending for the general welfare be via an equal Citizen Dividend.
2) all other privileges for depository institutions are abolished and those privileges include the FREE ( worse, positive interest on reserves (PIOR) ) use of the Nation’s fiat.
yeah my money market account at my local bank is sucking everybody dry with the .5 interest it earned up until 2016 or so, briefly it held 1 percent but has since been reduced to .75
Nothing wrong with saving money, in fact I feel as though we’ve been telling people the opposite for the last 40 years. My econ 101 class in college started off by stating that saving is bad. I pay taxes on my interest, but if you buy a house you write of the interest.
The problem comes, in my opinion, when the fed lends to the banks at nothing and then they charge you 15 or 20 percent on your credit card.
In a real Casino, that large a point spread is called a “Skim.” (Look up the allowed ‘House Percentages’ on most table games. The casino owners would kill to get banking sized spreads.)
Here’s something on casino spreads: http://factsongambling.com/games/house-edge-percentage-chart/
According to the charts, the banking industry is not only a casino, but the odds are stacked against the small ‘players.’ The Mob never had it so good.
My econ 101 class in college started off by stating that saving is bad.
A half-truth since SOME risk-free savings are good which is why there should be a negative interest exemption for individual citizens at the Central Bank up to a reasonable account limit.
Otoh, large and non-individual citizen accounts, including (and especially?) depository institutions should have no such exemption but have negative interest levied on their deposits.
I was able to save about 500 a month for 2 years, and when I quit the job I couldn’t stand anymore that money was able to feed me and house me for about a year. That is true freedom.
Negative interest and yields on large and non-individual-citizen accounts at the Central Bank could fund an equal Citizen’s Dividend for ALL citizens.
Your “true freedom” ran out while a Citizen’s Dividend would not.
Thank you for clarifying your position.
Yes the big and bad actors shouldn’t have all this largesse shoveled at them just for having a positive balance. I seem to remember some issue during the mortgage meltdown where institutions were raking in tons of interest (from the Fed?) after being bailed out, although I don’t remember the specifics.
But if as a society were are all subject to inflation and paying interest on loans from private institutions, then the individual citizen ought to make a reasonable amount of interest on their deposits.
That being said, I’m all for abolishing interest completely and most of the financial institutions who rake it on off the spread. The world won’t end.
But if as a society were are all subject to inflation lyman alpha blob
Imagine if all fiat creation beyond that created by deficit spending for the general welfare were replaced with an equal Citizen’s Dividend and all other privileges for the banks were abolished so that their ability to safely create deposits was drastically minimized?
Would inflation matter that much since Cantillon Effects would be minimized?
and paying interest on loans from private institutions, ibid
Sufficiently large negative interest levied on large and non-individual-citizen accounts at the Central Bank would encourage their holders to disgorge their hoards and that might easily mean near or even below zero loans! Of course it would also encourage them to buy up real assets such as land, rental houses and apartments and drive up rents and housing costs – hence the need for limits to real asset ownership.
then the individual citizen ought to make a reasonable amount of interest on their deposits. ibid
With proper reforms, except for the richest of course by definition, an equal Citizen’s Dividend should outweigh the income lost due to the abolition of welfare proportional to account balance.
I think this answered a question I had above. But more detail would be good anyway.
I suppose by now I’ve written a book under various pen names besides this one.
Some of my earlier comments (and I’ve been doing this for 10 years or so) are no doubt not worth as much as the latest – live and learn.
Anyway, all my recent comments are under this pen name here and at NEP with comments at Michael Norman and billyblog (Bill Mitchell) under another one.
Best wishes to the younger generations; I’ve always been at odds with my own generation (the BB’s) and am sad you guys have been screwed over.
Thanks for your encouragement – not that I need or desire much, mind you. :)
“But we live in a world where people who save and accumulate wealth expect as if it is a natural right that they can get an income from it.”
While it’s true that there are those that believe it is their natural right (aristocracy, monarchies among the mentality), many accumulate because of job precarity.
The well-connected need to get it out of their heads that there is always some kind of job around the corner.
And if ageism didn’t exist, I’d be more critical of the type of interest accummulation some criticize.
It’s not welfare I criticize but welfare proportional to account balance – a form of welfare that comes at the expense of welfare according to need and/or an equal Citizen’s Dividend.
The sad irony is when those who defend welfare proportional to account balance cheat themselves out of a potentially larger income from a Citizen’s Dividend.
They are.going to go to negative interest rates.
There will be no wealth accummulation through interest like the past for the changing demographic of the country. That ladder is being pulled up as well.
The ones who have accummulated the most will bot be taxed. So the changed demographic coming up in the USA will have zero to negative interest and a tax burden.
There is no way they are going to say it outright because they don’t want people taking money out of the bank in droves. They are alowly walking toward it unless they get the cover of another crises to put the move under.
Following the financial collapse in 2008 and the Bernanke-Yellen Fed’s and Obama administration’s “foam the runway” policies of interest rate suppression; massive cash liquidity injections into the financial system; regulatory and legal forbearances; and state intervention in markets to save the mega-banks and and politically connected speculators from themselves, we have had eleven years of very low or negative real interest rates that have transferred wealth to Wall Street and enriched hedge funds, private equity firms, corporate CEOs, and speculators of various stripes beyond their wildest imaginings. These policies have led to historically high concentrations of wealth in the hands of a relative few with negative attendant effects and long-term social and political implications for representative democracy.
Unfortunately, most of the benefits of these historically low nominal rates have not been passed through to ordinary Americans, who instead of debt reduction continue to pay high real rates on their credit cards even while believing they are receiving tangible benefits such as “earning frequent flyer miles” from buying goods and services with credit card debt. Too, elderly savers have been materially damaged as nominal interest rates have been suppressed, failing to keep pace with the rate of price inflation in food, shelter, state and local taxes, and other necessities, and their retirement savings have been eroded. Moral hazard in spades.
Due to McJobs, the “Three D’s” (Debt and Demographics = Deflation), the various maladjustments that have now become embedded in the economy and financial system, and the political influence of those who perceive they benefit from negative interest rates, I don’t expect this issue will be going away anytime soon despite the clear failure of negative nominal interest rates to spur demand and economic growth in Europe and Japan. Instead, it is clear they have the reverse effect, along with negative social consequences.
Thank you Chauncey Gardiner, you’ve hit the nail on the head. I’ve been pondering for almost a decade how this all ends and every thing leads to the conclusion this will end when the dollar loses the reserve currency. Which would make the 500 a month I’ve painstakingly saved worth nothing. Something to be said about precious metals or true assets when you’ve reached that conclusion. Any system can be good or bad, its a matter of rules and enforcing them. The rules only apply to us little people, so we better stop arguing and fighting amongst ourselves come together.
In my more gloomy moments, I think that the only ‘true asset’ will be a defendable hill, with a deep spring, good agricultural land, a group of family members/staunch friends, and lots of guns. Or, pitch forks and sythes. And an ability to live in a state of constant warfare.
Haha yes indeed, but being pessimistic enough as it is I try not to venture down that road too often.
…you had me until warfare
I am not a fan of warfare, but realistically, if the value of other assets disappears, those who have not had the foresight, or the means, to acquire a defensible hill and a community, are going to want a share. And, ‘defensible hill’ is a metaphor.
I don’t expect this issue will be going away anytime soon despite the clear failure of negative nominal interest rates to spur demand and economic growth in Europe and Japan.
Repeating what I said to Trent:
Negative interest and yields on large and non-individual-citizen accounts at the Central Bank could fund an equal Citizen’s Dividend for ALL citizens.
Now please inform me how a Citizen’s Dividend would NOT spur demand?
The clear failure is an unethical finance system which you would do well to stop defending.
You’re certainly right the issue won’t go away or at least you should hope so. Or is welfare for the rich your idea of justice?
Yep, it’s not going away.
They are slow walking people to negative interest rates so that it won’t be a run on banks. And, from what I gather, it’s destructive (that’s all you need to know to understand they will be doing negative interest rates) and anything destructive they are all for as long as it creates a chaos where the the same rats are in control.
Note that all the biz “innovations” from Google “checking” ,to Libra…are all about putting another middle man in bewteen transactions. How many f’ers does anyone need betweem themselves and a point of sale?????
These “innovators” only know that when the negative interest rate excrement hits the fan, it will be easy to spin as a currency crisis and get people to run to their currencies or whatever mess is on offer.
I have the impression that Japanese people have been quite well supported financially as their economy has stagnated. So what is bad about that?
Goooooood Moooooorning Fiatnam!
You never wanted to get caught holding folding that never lost interest under the new aegis…
If they found it on your person, the best you could hope for, was they would set up a negative interest losings account for you with the filthy lucre, the worst, outright confiscation.
If questioned, you were to only give rank of denomination and serial number, nothing more.
I am a saver and I try to add to my savings every year. I still haven’t managed to make the interest that I received in 2011. At the rate I am going, it will be a long time yet until I make the interest I earned before the financial crisis. My principal increases but my interest earned remains lower than before the crisis. I hope the billionaires know what they have done to real savers.
And what does NIRP do to the carry trade and currency exchange trades? And bond vigilantes? etc.
As I keep passing along: “Negative interest rates are the markets way of taxing those that have avoided paying their fair share.”
Of Course the Fed doesn’t want the wealthy to pay their fare share, they will leave no stone un-turned to keep that from ever happening.
However if you look at a plot of how high interest rates can go before a stock bear market is triggered, there is a very clear downward trendline. Rates are above that line now, and the worst part is by the end of the next recession, the trend line will be below 0% interest rates.
So at some point the stock market (and other semi-fungible assets?) will force the wealthy to pay their fair share if the Fed doesn’t let the bond market do it.
That which can’t continue, won’t.
It’s gratifying to see how the market and ethical considerations converge to the same solution.
Thanks for this.
“So at some point the stock market (and other semi-fungible assets?) will force the wealthy to pay their fair share if the Fed doesn’t let the bond market do it.”
Which to me seems about the same as letting the market clear. Reduced values of assets and bank failures beyond the insured amount would have given the wealthy a haircut. Why did they not let it happen if negative rates are going to do the same? They can control negative rates and enforce them on who they choose. I prefer the markets randomness to some technocrat deciding who pays negative rates and who doesn’t. This entire farce for the past ten years has been about keeping the wealthy wealthy and in charge, why would that change under negative rates?
I prefer the markets randomness to some technocrat deciding who pays negative rates and who doesn’t. Trent
Individual citizens would, by law and if need be by Constitutional Amendment, be forever protected from negative interest rates up to a reasonable account limit – as a natural right of citizenship.
Negative interest would ONLY fall on large and non-individual-citizen accounts. As to what constitutes “large”, that’s a political question but a reasonable starting point would not be less than $250,000, the current insured deposit limit in the US.
I’m weary of repeating myself and ask that before anyone else questions me that they at least read my other comments on this post.
Sounds like the old mantra for the majority: Work, Eat ,S…, Die.
Then add the new rule : you can save all you like, but we will punish you for doing so.
Capitalism demands continually increasing exploitation, consumption, growth, pollution and ongoing destruction of natural habitats and other species.
Arrogant, callous, destructive and pathologically short-sighted.
Arrogance is assuming that one should have an unlimited right to store or use the Nation’s inherently risk-free sovereign debt FOR FREE.
Or is being a rich free-loader your idea of justice?
Btw, clever hiding behind Bambi, pollution and environmental destruction in your attempted defense of the indefensible.
Clever but contemptible.
Pardon me if I’m being unduly harsh because I do agree that individual citizens should be shielded from negative interest – but only to a reasonable limit.
What do you think that reasonable limit should be? Infinity is not an acceptable answer…
+1, Tony Wright.
NBAT, I Believe the negative interest rates you say you support would more likely serve to further boost already extended stock and bond prices. In fact, that would be the intent. As you asked me above, …”Or is welfare for the rich your idea of social justice?”
I Believe the negative interest rates you say you support would more likely serve to further boost already extended stock and bond prices.
There’s no helping that existing sovereign debt owners would gain from negative interest and yields on new sovereign debt unless government should renege on existing sovereign debt – which is forbidden in the US by the 14th Amendment, sector 4.
As for stocks and non-sovereign debt, those are inherently risky and let the buyer beware. And why should ordinary citizens take risks when guaranteed a risk-free Citizen’s Dividend?
That said, there also needs to be limits to the ownership of real assets such as land so that the rich are not driven out of their inherently risk-free assets only to inflict rent and higher home prices on the rest of us.
I assume that when a “negative rate” is being discussed here, it refers to the rate that the Fed sets and defends in its clearing operations?
Because as I understand it, many longer term instruments already feature negative real returns once inflation is taken into account, right?
I am a banker and my only real product is debt.
Who can I load up with my debt products?
Pre-2008 – The West
They can’t really take any more of my debt products, who else is there?
Post- 2008 – Emerging markets
The global economy is now full of the banker’s debt products (well nearly).
Keep lowing interest rates so I can squeeze a few more of my debt products into your economy.
When you hit zero, then just go negative.
This is how I earn a living, and I’ve got to shift these debt products.
Keep lowing interest rates so I can squeeze a few more of my debt products into your economy.
When you hit zero, then just go negative. SoS
Cute. But you don’t distinguish between:
1) ethical means to lower interest rates (i.e. negative yields and interest on risk-free debt except for an individual citizen exemption up to a reasonable limit PLUS an equal Citizen’s Dividend)
2) unethical means to lower interest rates such as our current system of welfare for the banks and rich (i.e. asset purchases by the Central Bank from the private sector and other privileges for the usury cartel (e.g. deposit guarantees) and the rich).
This is what has been happening.
This is the UK:
We topped out in the early 1990s when interest rates were higher.
Then interest rates fell and the debt fuelled growth model started working again.
We hit the Minsky Moment in 2008.
We have been squeezing some more debt in with ultra low rates since, but it’s just not the same.
This economic model runs on debt.
My point is that our current method of lowering interest rates is via welfare for the banks and the rich. But how does that help potential consumers? It doesn’t; rather it is used to eliminate jobs with unethically financed automation and REDUCE the ability of the non-rich to spend.
So HOW low interest rates are produced is critically important – if we lower them ethically then they should be a blessing, if not a curse. What else should anyone expect?
What has the average person got to do with anything?
They are not a concern.
I was joking by the way, I am not a banker.
What has the average person got to do with anything? SoS
An 1895 8th Grade Final Exam: I Couldn’t Pass It. Could You?