Janet Yellen Admits Fed Is Evaluating Possibility Of Negative Rates
One week before the BOJ shocked the world by adopting negative interest rates and unleashed the next leg lower in global risk assets, it warned everyone “please not to worry, all is under control”
Moments ago at least Yellen had the courtesy of “warning” market participants in general, and banks and savers in particular that legal, logistical or monetary concerns aside, the Fed is already evaluating the possibility of negative rates.
“We had previously considered them and decided that they would not work well to foster accommodation back in 2010. In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation.“
As Bloomberg reported first earlier this week, a Fed staff memo posted on the central bank’s website last month showed Fed economists grappled with a number of issues related to implementation of negative rates at the time, including possible legal obstacles. Yellen said Thursday that negative rates might be legal, but the question remained open to further examination.
Among the other concerns were whether the Fed has the logistical capacity to implement NIRP:
… the Federal Reserve computer systems used to calculate and manage interest on reserves do not currently allow for the possibility of a negative IOER rate, although these systems could be modified over time if needed.
And a further concern about NIRP is the potential lack of physical cash:
DIs might opt to shift a significant quantity of their reserve balances into currency. Present Federal Reserve inventories of currency, at about $200 billion, would not be adequate to cover large-scale conversion of the nearly $1 trillion in reserve balances to banknotes.
This is what she added today:
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