Fed Vice Chair Explains Why The Fed Is Still Obsessing With Negative Interest Rates
Two months ago, and roughly 6 weeks before the Fed’s first rate hike in 9 years, Janet Yellen warned that if the “outlook worsened, the fed might weight negative rates” adding that “negative rates could help encourage banks to lend.”
Moments ago, in a speech titled “Monetary Policy, Financial Stability, and the Zero Lower Bound” delivered before the American Economic Association in San Francisco, the Fed’s second in command, Vice Chairman Stanley Fischer while discussing the equilibrium real interest rate, or r* (or the real interest rate at which the economy would settle at full employment and with inflation at 2 percent, provided the economy is not at the ZLB), unexpectedly hinted once again at the potential advent of negative rates in the US, two weeks after the Fed’s raised the interest rate to a 25-50 bps corridor except of course for December 31 when as we noted, the Fed Funds dropped to 0.12%, suggesting that banks are perfectly ok with hiking rates… except when it comes to quarter and year-end window dressing for regulatory, compliance and public filing purposes.
Specifically, Fischer discussed what steps, if any, can be taken to mitigate the constraints associated with the ZLB? His second answer: NIRP. To wit:
Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation. Our colleagues in Europe are busy rewriting economics textbooks on this topic as we speak-and also helping us to remember earlier discussions of negative interest rates by Keynes, Irving Fisher, Hicks, and Gesell.
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