Negative interest rates are spreading like a virus. Central banks in the Eurozone, Switzerland, Sweden, and Japan all have below-zero policy rates. “NIRP,” as economists call a negative interest rate policy, is a desperation move—but the only move those central banks have.The Federal Reserve hasn’t followed—yet. When the next recession strikes, I believe Janet Yellen will choose to break the zero lower bound. The rationale was laid out in Jackson Hole. Look behind the headlines and you’ll see the Fed already preparing for NIRP.
In theory, negative rates should encourage consumers and businesses to spend more freely and stimulate growth. It hasn’t worked out that way. NIRP just punishes savers and makes everyone miserable.
The Fed Moves Slowly
Major Fed policy changes unfold very slowly. Remember “The Taper” plan to end quantitative easing? Ben Bernanke first floated the idea in May 2013. It took until October 2014—a full 18 months—to finally end the bond-purchasing program. And then it was another 14 months before the Fed hiked rates with a baby step in December 2015.
The Fed shouldn’t let markets dictate its decisions, but we all know it does. They start hinting months, even years ahead of time in hopes markets will adjust slowly. Sometimes it works.
With NIRP, there’s another complication: The Fed hasn’t done this before. It needs to get ready.
Learning the NIRP Ropes in Jackson Hole
What better way to learn the NIRP ropes than from fellow central bankers who have actually done it? The Fed’s recent Jackson Hole retreat was an opportunity. And sure enough, they had a session on Negative Nominal Interest Rates.
The lead presenter, Marvin Goodfriend of Carnegie Mellon University, is an unabashed NIRP proponent. His paper “makes the case for unencumbering interest rate policy so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.”
Click for Full Text!
Poster Comment:
I for one am hoping they jack up negative rates sky-hi, I'll borrow like a $1000 and not pay it back and use the interest to buy a new stereo or something.