Fed Opens Negative Interest Rate Pandora's Box: What Happens Next

Tyler Durden's picture

As we already commented extensively, while the Fed's dovish non-hike was a violent surprise for the market, and has led to what may be the first thoroughly unanticipated (at least by the market) policy mistake by the Federal Reserve (judging by the market), the biggest news was the very symbolic, yet all too ominous, negative interest rate forecast in the Fed's projection materials by one FOMC member.

This was the first time in Fed history that an FOMC member has on the record predicted NIRP in the US.

Janey Yellen's subsequent non-denial during the press conference did not exactly inspire hope that the Fed was just "joking":

I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.

Furthermore, when considering that virtually all of Europe is already flooded by NIRP, and earlier Bank of England's Andy Haldane, one of the otherwise more rational members of the central bank, advocated negative rates in the UK, one can be virtually certain that unless there is a dramatic rebound in the global economy, the next step by Yellen will not be a rate hike, but easing (just as Goldman predicted) right into negative interest rate territory.

What would NIRP in the US mean in practical terms?

For the answer we go straight to, drumroll, the Fed itself whose New York economists discussed precisely this topic just three years ago and issued a very stark warning (which apparently the Fed itself decided to ignore), saying "If Interest Rates Go Negative . . . Or, Be Careful What You Wish For."

This is what the New York Fed said in August 2012:

If Interest Rates Go Negative . . . Or, Be Careful What You Wish For


One way to push short-term rates negative would be to charge interest on excess bank reserves. The interest rate paid by the Fed on excess reserves, the so-called IOER, is a benchmark for a wide variety of short-term rates, including rates on Treasury bills, commercial paper, and interbank loans. If the Fed pushes the IOER below zero, other rates are likely to follow.


Without taking a position on either the merits of negative interest rates or the Fed's statutory authority to fix the IOER below zero, this post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk). 


Cash and Cash-like Products 


The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals. The largest denomination bill available today is the $100 bill. It would take ten thousand such bills to make $1 million. Ten thousand bills take up a lot of space, are costly to transport, and present significant security problems. Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.


If rates go negative, we should also expect to see financial innovations that emulate cash in more convenient forms. One obvious candidate is a special-purpose bank that offers conventional checking accounts (for a fee) and pledges to hold no asset other than cash (which it immobilizes in a very large vault). Checks written on accounts in a special-purpose bank would be tantamount to negotiable warehouse receipts on the bank’s cash. Special-purpose banks would probably not be viable for small accounts or if interest rates are only slightly below zero, say -25 or -50 basis points (because break-even account fees are likely to be larger), but might start to become attractive if rates go much lower.


Early Payments, Excess Payments, and Deferred Collections


Beyond cash and special-purpose banks, a variety of interest-avoidance strategies might emerge in connection with payments and collections. For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.


We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.


Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.


As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates.




The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

Yes, the conclusion is staggering: the Fed itself previewed the complete debacle that the Fed itself is now preparing to unleash with NIRP which will lead to "an epochal outburst of socially unproductive—even if individually beneficial—financial innovation." Not only that but the Fed, in a moment of rare lucidity, admitted that "private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants."

Tell that to Europe, Sweden, Switzerland where NIRP already reigns supreme, and all other countries where NIRP is coming.

But what may be missed between the lines is the Fed's explicit observation that in a world of NIRP, cash will reign supreme, as everyone rushes to withdraw their "taxed" bank deposits and keep the funds in the form of paper cash, hidden safely somewhere where the bank has no access, and where no bank can collect an interest rate for the "privilege" of being funded with a negative rate liability.

Furthermore, as the Fed correctly observes, "the usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals."

So what is the alternative?

The answer was hinted during Andy Haldane's speech earlier today in which he not only urged the banning of cash but the implementation of negative rates, two concepts which, after reading the note above, should intuitively go hand in hand: as we commented "one idea, Haldane told an audience of business owners in Northern Ireland, could be to scrap cash and adopt a state-issued digital currency like Bitcoin. Although widely reviled as the currency for drug dealers and criminals, Haldane said Bitcoin’s distributed payment technology had ‘real potential’. Which may explain the Fed's sudden fascination in the virtual currency."

And fascination it is. Below are some examples of recent Fed research on a topic which as recently as 2011 it held as a heretic taboo, and which the ECB considered a Ponzi scheme as recently as November 2012:

Last but not least:

Of course it does. Why? For two simple reasons:

  • First, as noted above, cash and NIRP simply do not mix as cash provides the general population a handy way of circumventing the intentionally punitive implications of negative rates, which as a tax on all savers, would force everyone to spend savings the moment these were created. The thinking here, of course, would be that with savings immediately converted to consumption, the velocity of money would surge and boost economic growth in the process even if it was conducted under punitive rate duress.
  • Second, and even more important, is the blockchain basis of bitcoin, which is precisely why the Fed is so fascinated by it. With a perpetual and current ledger of every single transaction in the monetary domain, a digital currency such as bitcoin provides the Fed something cash never would - a constant database (or ledger) of every single transaction everywhere and any given moment.

It is the second aspect of bitcoin that has led to such recent headlines as "Big banks consider using Bitcoin blockchain technology" and, of course, Bloomberg's piece from September 1 in which "Blythe Masters Tells Banks the Blockchain Changes Everything."

Yes it does, and especially in a world in which the Fed regulates all blockchain transactions under a negative interest rate regime: quite simply, the combination of blockchain and NIRP give the Fed supreme control over all transactions.

Simply said: bitcoin under NIRP is a Fed match made in heaven.

There is just one small hurdle - eliminating cash as a transaction medium entirely. However, considering the US experience with confiscating monetary intermediates most recently observed with Executive Order 6102 when FDR confiscated all US gold, will the Fed allow such a little "problem" as "sequestering" available cash stand in the way of NIRP dominance? Of course not, especially if the alternative is the complete loss of central bank credibility.

Which, in a nutshell, is what Kocherlakota's negative interest-rate dot unleashed: a world in which the existing cash/ZIRP paradigm becomes blockchain/NIRP (and where the Fed is aware of every single transaction).

And, before you ask, will there be substantial - and violent - opposition to the Fed's mandatory conversion of cash to bitcoin? Of course. But that too certainly not stop the Fed, which fighting for the survival of trillions in legacy "wealth" would simply steamroll over anyone and anything courtesy of the US government's armed backing (which has conclusively proven in recent years its function has metastasized to serve only the wealthiest corporations and Wall Street interests) to preserve such wealth, if only for a little longer.

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Budnacho's picture

Yeah....Once the Cash goes so will the Fed....at gunpoint.

Money Counterfeiter's picture
Money Counterfeiter (not verified) Budnacho Sep 18, 2015 2:10 PM

This will not end until the fascist are hanging at the end of a rope.

LawsofPhysics's picture

^^^every single Fed governor and politician that facilitated this fraud.

nothing changes otherwise.

Deathrips's picture

The Fed removes the lube for the middle class...and exponential fuckings commence?


Just a guess.

Long Physical, Short WTI paper for fun.


realmoney2015's picture

It's hard to believe people actually beileved that the fed was going to raise rates. They won't raise rates EVER! They will start a new money printing scheme, whether they title it QE4 or not, before they raise rates. At this point I think a movwe of 25 base points in the wrong direction is more likely.

Stack on ZHers!

Scooby Dooby Doo's picture

Hey Gang! It's Scooby time!

Lets start with a Scooby singalong, ok?

Scooby Dooby Doo where are you?
I'm down at the bank doing a HELOC!

And Scooby Dooby Doo why are you doing that?
It's time for 'merica to start spendin'.

Hey gang let's do this thing. Lever up you stoopid fin-dummies!

Mr. Ed's picture

Trial balloon? Staged neg interest rate question @ presser + FOMC hint at NIRP meant to trigger discussion and analysis in forums, news and social media... just so the Fed, Deep State and others could look for potential roadblocks to their plans?  And, to see what they could likely get away with.

messymerry's picture

Oh!!!  PLeeze, pleeze let me be there when you 'perp' walk them in their chic little orange jumpsuits to the SLAM!!!


ThroxxOfVron's picture

"The Fed removes the lube for the middle class...and exponential fuckings commence? "


As if lube would matter when the the evil bankster clydesdales are laying into you.

ZIRP on your deposits and your credit cards will still be compounding away @ 14.99%

...& You are dreaming if you think submarine variable interest rate mortgages are going to be handed out to anyone that doesn't already own skycrapers and rolling acres..

MANvsMACHINE's picture

Just a crazy thought here but how about precious metals as a store of wealth?

I know, I'm a bit of a loon but just sayin'.

gatorengineer's picture

If you havent noticed they are trying hard to break that market.

Cadavre's picture

"This will not end until the fascist are hanging at the end of a rope."


Time for an honesty check. The "lost in the world of bling and empty vanity" dummies you call "fascist did not make this happen. We, the commons, allowed it to happen. The person to blame is the one who stares back at us with apothetic eyes from the mirror.

Be empathic. Fools are fools because their genetics failed them. The bad guys are the defense kapo running their games from the K-Street kiidie brohels. 

The logic of being civilized means ending capitol "ruse of law" cons, like the death penalty. We only need to restore the "rule of law". The weak edict slingers our apathy allowed to deliver the precarious moment we find ourselves in is our fault.

That being said, the imagery of Mussolini and his whore hanging by their heels is  appealing, but not very productive, helpful, or civil.

It's our fault this has happened. We allowed them to caste us into the feudal designation, "consumer", when, infact, the commons is the only producer of wealth. Presidents, senators, etc, etc, are not our leaders, or our rulers. They are our employees, and we got lazy, and forgot to ensure they read the corporate policy and corporate operations manuals.

I am not saying the politicos will not have to do time in a reducation center. But the ease with which we allowed capitol punishment to be the answer, the false logic that state revenge by murder is a useful tool of governance is a false failed logic.

Restoring the "rule of law" and ending the "ruse of law", and thus a rebirth of the United Staes of America, through aborting the malignant "United States of Defense Contractors" is the goal. Not vengeance (although the . mousolini hanging by his heels" does seem fun), we need to first accept that we caused/allowed this to happen. And then we just need to understand that there are 3 hundred million of us and just a pocket full of lint, by comparison, of them.

We are the empowered, the powerful, both by the rule of law, and physics of sheer mass.

Politicians are not rulers, they are employees hired to administrate the common's authorizations, meaning, the body politic known as the 'commons' is the only leadership.

Ww need a plan, a manifest, of sorts, that will convince the weak, operating under the blind logic of vanity we see on CSPAN, to surrender their assets, licenses and passports and accept house arrest while a provision government quickly reestablishes a threshold fot the nation to restore the rule of law.

Direct democracy is the only democracy that assure the commons' will will be done.

But behaving like those poor fools we apapthetically and vainly allowed to put their shorts on backwards for the Genocide Banks, is just repeating - recycling - the false logic that delivered this moment, looks like a bad idea. WE THE COMMONS, RULE AND OWN THIS SHIP OF STATE AND EVERY ASSET ON IT. AND WE CAN TAKE IT BACK AS SOON AS WE REALIZE HOW EASY THAT CAN BE DONE. 

Lets get smart. We've been in a stupor way too long.

tarsubil's picture

Exactly, how in the hell are they going to actually ban cash? That seems like just a little too much. I can see them doing NIRP until they see people emptying their savings accounts. Yellen commented about how she was surprised that slightly NIRP didn't lead to empty savings accounts. We really are in the twilight zone.

Hype Alert's picture

There might be a run on gift cards.  Would work like a cashiers check.

Bernoulli's picture

NIRP in Switzerland is reality and not so much has changed for the "normal" people.

But then once it changes, it could go quickly.

My guess is it starts at minus 1% or minus 2% that average Joe will move to cash.

Thank god in Switzerland there are thousand Franc bills. Not so much hassle with the big bundles of hundreds...

hannah's picture

ban cash...? who exactly has cash these days except the wealthy. i seem to wait in line at the bank behind idiots that have 2 cents in their accounts. find 10 people that actually have cash 3 days after they get paid....

Miffed Microbiologist's picture

I have a significant amount of cash relative to my income outside of the banking system that I have been stockpiling for years. Plus PMS and barterable items ( Mr has experience in construction, slaughtering and farming.) Believe me, I had to forgo a lot of things to do this.

Living off the grid for a month in 2002 woke us up. There is no way if disaster, economic or natural, were to happen there would be enough support for all. The window for preparations is closing.


Implied Violins's picture

Ummm I wouldn't capitalize p.m.'s there...otherwise, right on. This weekend or next could very well be the last great chance to stock up while our debit cards still work.

Bananamerican's picture

"Living off the grid for a month in 2002 woke us up"

can you elaborate a little more on this Miffed?

are you saying it didn't go well?

Miffed Microbiologist's picture

In 2002 the Cedar fire ( largest in cali history) was started by a moron near our home. At 1 AM a wall of flames lipping the tops of the telephone polls came barreling down on us and we barely made it out alive ( several families burned to death west of us, they had no idea what was coming)

We managed to make it back in to our home ( the area was a smoldering moonscape) we had no power, heat, phone or water ( our well pump requires electricity) Looters were having a hayday taking advantage so we had to fend them off. Because we had a small generator we did better than most. My neighbor lost $400 worth of meat ( gave it away so it wouldn't go bad). Everyone in our area lost their hay except us. We had 5 tons. That became a precious bartering commodity but those who had nothing to trade, we gave some to them anyway. Funny how months later I'd come home to a stack of bales and never knew who gave them to me, I never asked for repayment.

Living without these things for a month was quite a personal as well as a societal education. You find out who your friends are quickly. I started prepping more in earnest after that event.


Bananamerican's picture

Looters? east of Sandy Eggo?


Were there surprises in the "find out who your friends are" Dept?

On a side note: I find it amazing we haven't had too bad a time of it yet relative to the drought....

fstwrtr's picture

Thats actually an encouraging story. One whould assume you would come home to people attempting to liberate you from your stores, after hearing you had undamaged assets...Prepping should be part of everybodys program.

jerry_theking_lawler's picture

Same here. Katrina woke me up. No 911 to save you, no fuel, no electricity, little water, no new food coming in.  Just you and your friends...all armed and protecting property(land, food, fuel, generators, etc)....with it being known to draw first ask questions second.  Really enlightening but not as much 'fun' as people think the chaos will be...

Chupacabra-322's picture

Friday news dump. These Criminal Psychopaths are going to close shop in the future & the uneducated Zombies will starve for a solution from the very Elite Criminals who produced the calamity.

Implied Violins's picture

I think the zombies will realize quickly how good lead-infused, rope-burned, drawn and quartered bankster/politician meat tastes, and (hopefully) develop an insatiable appetite for it (...but they *would* be missing out on brains).

messymerry's picture

I disagree, too fatty.  ;-D   

Implied Violins's picture

Ketogenic diets are the healthiest. In this case, though, lead poisoning could be an issue...

ultimate warrior's picture

Cash can not and will not be banned! Why do I know this? Because the government makes drugs/prostitution/gambling/etc illegal. How else will people be able to pay for these things? Either the government will have to  make everything legal so there is no black market or everyone in the world will have to stop using drugs or banging prostitutes for this cashless society to work. I just don't see either of these scenarios happening. 

ghostzapper's picture

Wow - ZH throwing around the term "blockchain" like they're at an MIT kegger.  I like it.

Tinky's picture

Very good horse, but Frankel was cheating.

ghostzapper's picture

Not in a position to comment on that.  Won in brilliant fashion at multiple distances.  Injuries blocked a BC Sprint and back to back BC Classics.

Fed knows about bubbles - Bitcoin/Blockchain/Fintech are sitting there on the tee waiting to be inflated.  

Tinky's picture

Unquestionably he had a ton of talent.

Seasmoke's picture

And it looks like he passed it on to Chad Brown. 

I woke up's picture

Be your own bank

robertocarlos's picture

Back of Carlos. I love it. I'm gonna need an engraver and a printer and some linen paper. I don't want any assholes counterfeiting my bills. I promise not to print more than I need.

NDXTrader's picture

TPTB have probably shaken enough people today. As much as it pains me to say it - probably the buying opportunity of the year here. We are going much higher - more BOJ and ECB QE soon

dexter_morgan's picture

Maxine Waters is onboard, so you know it is good.



Ward cleaver's picture

U have to ask yourself why buffalo waters is so interested in ZIRP. Her constituents certainly r not active in the "markets" so what is her agenda?

>. She gets donations for her "community endeavors" paid for by the banksters

>. She is so stupid she has no idea what's going on but likes to hear herself talk

>. Husband has a rooting interest

>. She needs market to stay high thru elections

>. You don't give a shit

farmboy's picture

For sure there will be unforseen consequences but.

1. It will lead to bankruns depleting capital for the banks and shorten balance sheets as everybody pays down debt as much as possibile = banking crises

2. Insurance companies/banks/pension plans go bancrupt = banking crises.

We are doomed if they raise rates and doomed if they lower rates and doomed if it stays the same. Good job there are no good outcomes must be a Ph D to come with this.

WTFRLY's picture

They are just working it for the big nut, downward motion first before they hike deeznuts.

Gunga's picture

They won't stop of their own free will. We have to defend ourselves.

WTFRLY's picture

If the Fed doesn't play "politics", it's going to be a long 12 months until the election.

N57Mike's picture

"Pandora was a woman who lived with her husband in a paradise and was given a beautiful box for safekeeping with the caution that she ought not to ever, ever open it. For a time she remembered and kept her promise to not open the box but eventually succumbed to the temptation and decided to have a peek. The lid flew open as soon as she raised it and a swarm of imprisoned evils flew up and out into the world inflicting pain, greed, envy and manner of suffering on all they found."

"Pandora and her husband Epimetheus were also the victims of all these ills, knew they were responsible for the suffering and were grieving their part in it while sitting near the box. In the midst of their lamenting, they heard a small voice crying out from the box, "Open, open, and I will heal your wounds! Please let me out!" and while at first they were afraid to open it and possibly release even more troubles, they eventually decided to see who the plaintive voice came from. They fearfully opened the box and found a small bright-winged beautiful creature. It was well for Pandora that she opened the box a second thim, for the gods, with a sudden impulse of compassion, had concealed among the evil spirits one kindly creature, Hope, whose mission was to heal the wounds inflicted by her fellow prisoners"

Tinky's picture

You somehow neglected to mention that it was also the name of my first cat.

MANvsMACHINE's picture

I don't get it.  Was the box some sort of radio device that played music?

crazybob369's picture

And my first girlfriend. Wonder whatever happened to her.

Sorry_about_Dresden's picture

Interesting qoute!!!!

The source???? I do not remember hearing about 

one kindly creature among the evil spirits

DollarMenu's picture

Hope can be as toxic a demon as the others.

That is why it was imprisioned in the box with them.