Fed policymakers are negative on negative rates By Reuters

© Reuters. FILE PHOTO: The Federal Reserve on Mayday in Washington


By Ann Saphir

(Reuters) – U.S. Federal Reserve policymakers say they will do what it takes to cushion an economy crushed by the widespread lockdowns aimed at slowing the coronavirus spread, but there’s one thing they probably won’t do: take interest rates below zero.

“We must do all we can so that economic activity can resume once it is safe to do so and focus our efforts on returning to prosperity as quickly as possible,” Chicago Fed President Charles Evans told a meeting of the Lansing Chamber of Commerce, held via Zoom.

Rates will stay near zero for “quite some time,” he said.

But asked about negative interest rates, he was dismissive: “I don’t anticipate it being a tool that we would be using in the U.S.”

Last week, traders in futures tied to the Fed’s policy rate began pricing in — for the first time ever — a small chance of negative U.S. interest rates next year. On Monday they had mostly retreated from those bets, though contracts for October 2021 did reflect an expectation for below-zero rates.

Central banks in other countries, including Europe and Japan, have tried negative interest rates with mixed results. The idea is to punish banks for holding excess cash and thereby to encourage lending, in turn boosting business investment and consumer spending.

But Fed policymakers have long been wary of adopting such a tool, saying it could have the opposite of the intended effect or undermine financial markets.

And in the current crisis, they have said that negative rates would be particularly ineffective because it’s not the price of money but rather government restrictions and concern for public health that are keeping people and businesses from spending money.

Fed policymakers reiterated those arguments Monday, even as they repeated pledges to do most anything else to boost the economy.

Speaking earlier in the day on Yahoo (NASDAQ:) Finance, St. Louis Fed President James Bullard said that because the structure of short-term funding markets in the United States is different than in Japan and Europe, using negative rates would be “problematic.” Besides, he said, “It is not at all clear that they’ve been successful there…we can use other tools to handle the situation.”

Atlanta Fed President Raphael Bostic was equally negative about the possibility.

Negative rates are “among the weaker tools in the toolkit,” Bostic said in webcast remarks on Monday.

Ahead of a Senate Banking Committee hearing Tuesday, Fed Vice Chair of Supervision Randal Quarles released prepared remarks that praised banks for boosting lending during the crisis. However, he cautioned that the real limit on what banks can do is the overall health of the economy, which depends on the effectiveness of the public health response.

He did not say anything about negative interest rates, though it may well come up during the hearing.

“More may be required of us before the current crisis ends,” Quarles said. “We can only pledge to do what this moment demands.”

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by : Reuters

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