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.
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”