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.
* * *
... while it is hard to distinguish the effects of the rate cuts from those of concurrent asset purchase expansions, the easing appears to have been transmitted to assets of longer maturity and greater risk. Bond yields and bank lending rates declined, and, in the euro area, the volume of lending to corporations and households picked up notably. In addition, the rate cuts into negative territory have acted as expected through the exchange rate channel.
Negative policy rates have generally not been associated with the problems that likely were anticipated. Adverse effects on money market functioning have been limited. Cash holdings have not risen significantly in these countries, in part because of non-negligible costs of insuring, storing, and transporting physical cash. These favorable outcomes may be partly because significant shares of deposits at central banks in these countries are not subject to negative rates. It is unclear how low policy rates can go before cash holdings rise or other problems intensify, but the European experience has certainly shown that zero is not the effective lower bound in those countries.
Could negative interest rates be a policy response that the Federal Reserve could choose to employ in a future crisis? One possible concern with a strategy of this sort in the United States is the potential for destabilizing effects in money markets. For example, various observers have noted that negative rates could lead to scenarios in which money funds “break the buck” or simply shut down, either of which could generate strains in money markets. Another concern is whether the complex and interconnected infrastructure supporting securities transactions in the U.S. financial system could readily adapt to a world of negative interest rates. For example, similar to the types of issues addressed ahead of the year 2000, there could well be automated systems that simply are not coded properly at present to process transactions based on instruments with negative rates. All of these are, of course, transitional problems, but they might be sufficient to make a move to negative rates difficult to implement on short notice.
What about longer notice?
In summary: while the vice-chair admits there are problems with negative rates, Europe's "successful" experiment with NIRP so far suggests this could be transplanted to the US, and adds that any problems are ultimately "transitional", or nothing that can't be fixed if the Fed set its mind to it.
But enough about NIRP: what about rising rates even higher? Here is under what conditions the Fed would consider even more rate hikes in the future:
I believe that the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic, and that if asset prices across the economy--that is, taking all financial markets into account--are thought to be excessively high, raising the interest rate may be the appropriate step.
His conclusion: "Further discussion of this issue will probably bear considerable similarity to the analysis of how to deal with asset bubbles that took place in the United States in the decade starting about two decades ago." An asset bubble, which as everyone knows, the Fed failed to see until it is too late.
So, if in the Fed's opinion, asset prices are excessively high, "raising the interest rate may be the appropriate step" - this coming from the same Fed which failed to see "excessively high" asset prices during the past two bubbles. More importantly, this also means that if asset prices are "excessively low", well then the Fed will clearly lower interest rates, first to zero, and then to negative, because after the infamous Kocherlakota dot, with every passing month the Fed's obsession with NIRP as the logical "exit" from its rate hike "policy mistake" is getting more and more obvious.
* * *
Finally, to help the Fed with its quandary why the equilibrium real rate will never be able to rise, here is an explanation we posted a month ago using some very simple logic from Deutsche Bank:
One might argue for low “implied” equilibrium short rates via debt ratios. For example, if nominal growth is 3 percent and the debt GDP ratio is 300 percent, the implied equilibrium nominal rates is around 1 percent. This is because at 1% rates, 100% of GDP growth is necessary to service interest costs.
In this case, real growth would slow in response to rate hikes because productivity would stay weak at full employment and companies would be profit/price constrained around paying higher wages. Moreover, nominal growth would then slow even more than real growth does because inflation would fall to 1 percent or below.
DB's conclusion:
"This is the important policy error scenario because even a very shallow path of rate hikes might drive the real Funds rate well above the short-term equilibrium real rate, further depressing demand. It is then plausible that the economy would be driven into recession, and the Fed would quickly be forced to abort the hiking cycle. As an aside, such a policy error could reinforce itself by causing structural damage that puts additional downward pressure on the equilibrium real rate. In this case the yield curve would flatten meaningfully, at least until the Fed actually reversed course by cutting rates."
Hence: the Fed's seemingly inexplicable obessions with negative rates.
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Dr. Antal Fekete wrote some time ago that declining interest rates destroy capital.
I have not followed him for a while now, but I wonder what he would think about rates falling further, and into negative territory...
Danger! Beware. Something wicked comes this way.
Negative rates will only work without banning cash up to a point, so they will ban cash soon enough. The E Dollar does both and is more effective.
Why do the Americans 'accommodate' their banks so much at the plight of the people? There are homeless everywhere that have no 'accommodations', they instead get the boot of a cop. Backwards ass cuntry
really just ignorant morons. its simple. no reading only exposed to media disinformation. willless hopeless human hogs feeding until they die. can you blame animals consigned to fattening unto death? perhaps. but in the end even the right to know and the ability to know has been stripped away as possible for the common person. and hopelessness "you can't do anything about it anyway" is the dominant mode of addressing theft of governments and freedom from the people they are supposed to belong to "the people" - by theives, criminals against humanity and you know who they are....
really just ignorant morons. its simple. no reading only exposed to media disinformation. willless hopeless human hogs feeding until they die. can you blame animals consigned to fattening unto death? perhaps. but in the end even the right to know and the ability to know has been stripped away as possible for the common person. and hopelessness "you can't do anything about it anyway" is the dominant mode of addressing theft of governments and freedom from the people they are supposed to belong to "the people" - by theives, criminals against humanity and you know who they are....
In order for any currency to actually work, it must be accepted by the producer.
I believe the Soviets have been down such roads before...
38BWD22: declining interest rates destroy capital.
You won’t see the forest from a single tree.
Capital during growth is not a problem. It’s welcomed. Capital can’t, won’t hold value, and it will become less needed as things intensifies the opposite direction—collapse and shortages.
Economic activity will all collapse. The new economic paradigm will be local.
Don't get bog down by ‘isms’. Don’t get distracted by economists, central banks, and religion, and Fekete. You will be wasting your time. We have a catastrophic human failure coming up.
You are lucky because you are in Peru. People there knows how to live with little. More than half of Peru is forest. Peru’s weather is mostly subtropical. Focus on that.
Actually, my Peruvian-American wife and I live in the US. Our business is in Peru.
I am well aware of the possible (likely) financial disaster facing us, and pretty much the whole world.
Your comment re capital not holding its value in an economic decline is most excellent, I will give that some thought. Generally speaking, holding productive capital (railroads, chip plants, etc.) is smart and good, but perhaps not so in recessions or worse. Bravo.
* * *
Dr. Fekete was the first that I know of to write about the issue of declining interest rates destroying capital (which is a strange idea to mainstream economists). Highly recommended reading.
But, do not be too quick to decry (some) religion. We can all become better people if we try...
So, if you don’t have a Peruvian passport yet, go get one tomorrow. Make sure you live in a location/home that has water underground. That you can get accesses without electricity, if that becomes the case.
Invest/buy a security company. You will need those people around. Have an home alarm system that can work of batteries, in case of shortage. The system just need to make enough noise to scare the intruder(s). Anyway, gun ownership in Peru is low. If you’re well armed, and trained, you will have an advantage.
Starting getting over this capitalism mindset and focus in communities. I know, not fun. But 5/10 years from now you won’t regret.
Gail Tverberg: I probably need to write a post on this.
As long as a person believes in infinite growth on a finite planet, pensions are sustainable. Once a person figures out how the financial system works, then it becomes clear that we have a real problem–at some point the whole system necessarily collapses, in the manner of a Ponzi Scheme that cannot be kept operating, because the whole system cannot keep growing fast enough. Once it collapses, banks collapse. We have a hard time producing much of anything. The amount distributed per person must necessarily be very small, assuming governments continue to exist.
http://ourfiniteworld.com/2015/12/21/we-are-at-peak-oil-now-we-need-very-low-cost-energy-to-fix-it/comment-page-3/#comment-76517
Gun ownership in Peru:
http://www.gunpolicy.org/firearms/region/peru
"So, if you don’t have a Peruvian passport yet, go get one tomorrow."
We've been thinking about that for some time. But, Peru's government is becoming more authoritarian each year. No escape.
"Invest/buy a security company. You will need those people around. Have an home alarm system that can work of batteries, in case of shortage. The system just need to make enough noise to scare the intruder(s)."
Yes re security. My in-laws already are alarmed up and have "puas" (spikes) protecting their house and the business.
Thanks for the link re guns in Peru. I'll take a look, but I believe they are strict there.
Nonsense. Get a layer and get the passport.
Strict? Again, nonsense.
http://www.streetsoflima.com/2012/12/what-are-perus-gun-control-laws-like.html
was this meant for Reader's Digest or something?
was this meant for Reader's Digest or something?
was this meant for Reader's Digest or something?
First negative interest rates, then a cashless society......yes where do I sign up for that BS.
These people are remarkable, in as much as they never seem to get tired of deceiving the population with regards to the agenda that they want to inflict on the slaves!
But first we will get civil and global war then wait for a disclosure that will rock the entire world......
http://beforeitsnews.com/conspiracy-theories/2016/01/top-secret-alien-ph...
Apparently the plan included making cashless easier to put in place by removing money altogether from a system that requires a consumer with money. Anyone see a problem with this approach out there?
Or do you still want to chat pro and con on irrlevancies of 'policies' which are just disinformation to stear you away from the reality...discussing the FED this or that, or a rate (when no actual rates exists anymore) or inflation in an ongoing deflation, or climate change when there should be no right to destroy the environment by corporations at all, or a welfare class created by financial larcenty and destruction of production to spit on while what they receive subsidizes the profit recipient of those funds landlords and food suppliers and allows corporations not to pay their share of supporting the society that allowed them to come into existence at all, and fucking so on.
What a bunch of irrelevant morons, talking about shit that doesn't matter cause it has nothing to do with reality, unless you consider dreams, delusions, false conversation, economic actors with no actual actions but misleading everyone including themselves the reality we could discuss as the actuality now.
What a bunch of fucking morons.
Apparently the plan included making cashless easier to put in place by removing money altogether from a system that requires a consumer with money. Anyone see a problem with this approach out there?
Or do you still want to chat pro and con on irrlevancies of 'policies' which are just disinformation to stear you away from the reality...discussing the FED this or that, or a rate (when no actual rates exists anymore) or inflation in an ongoing deflation, or climate change when there should be no right to destroy the environment by corporations at all, or a welfare class created by financial larcenty and destruction of production to spit on while what they receive subsidizes the profit recipient of those funds landlords and food suppliers and allows corporations not to pay their share of supporting the society that allowed them to come into existence at all, and fucking so on.
What a bunch of irrelevant morons, talking about shit that doesn't matter cause it has nothing to do with reality, unless you consider dreams, delusions, false conversation, economic actors with no actual actions but misleading everyone including themselves the reality we could discuss as the actuality now.
What a bunch of fucking morons.
" the Fed's second in command, Vice Chairman Stanley Fischer"
Second in command my ass. Supect that Stanley Fisher with dual citizenship is more than jus second in command. They had to give Yeller the job cuz she was a woman, but they neededed a man in there to make sure she doesn't screw up. Larry Summers said some bad things about women at Haavaad. That precluded Larry from being appointed (not elected). Stanley Fisher was the obvious second choice. Tribe member and intellectual father to none other than Ben Shalom Bernanke.
they these FED scum are in command of nothing except spewing disinformative bullshit. That should be quite clear by now and amazing they are still discussed as if anything they do has a structural connection meaninful to an economy...they only delay exposing what they were complicit in allowing through constant disinformation so irrelevant it cannot lead to any truth or vision regarding what is occuring in the real world of workers, production and what was once capitalism.
There is no solution but to remove every criminal corporate, military industrial, political ciminal perpetrating the destruction of the world the real economic world from the field of possible action -although more truly they are only obstruction to rebuilding anew and a limited and ultimately powerless force only in place because they are allowed to continue in place and no more.
Clean house is all that needs to be done, if only YOU ALL and ALL THEM SHEEP would grasp that and believe it and make it so.
WHen will it actually occur? Likely when its already too late.
they these FED scum are in command of nothing except spewing disinformative bullshit. That should be quite clear by now and amazing they are still discussed as if anything they do has a structural connection meaninful to an economy...they only delay exposing what they were complicit in allowing through constant disinformation so irrelevant it cannot lead to any truth or vision regarding what is occuring in the real world of workers, production and what was once capitalism.
There is no solution but to remove every criminal corporate, military industrial, political ciminal perpetrating the destruction of the world the real economic world from the field of possible action -although more truly they are only obstruction to rebuilding anew and a limited and ultimately powerless force only in place because they are allowed to continue in place and no more.
Clean house is all that needs to be done, if only YOU ALL and ALL THEM SHEEP would grasp that and believe it and make it so.
WHen will it actually occur? Likely when its already too late.
NIRP = off with their heads.
Transitional problems. I'm so sick of that fucking word.
They need to transition these central bankers to the gallows.
You’re a HATER !
It hurts The Fed’s feelings when you call them stupid.
Along with stacking, cash, land, food, and self sustaining systems I am hedging a bit into pre loaded debit cards. Still spend like cash when negative interest comes on line. Defeats the predictable, debit card only merchants that will initially emerge.
Negative interest rates are a total absurdity, unless you're going to abandon all the core principles of capitalism. Which is what it looks like the Fed is doing.
And not to express disobedience to my corporate masters or anything, but since when is it part of the Fed's "twin mandates" to stomp on financial markets "if prices are thought to be excessively high?"
"Markets".. LOL!!
Don't overthink this. The fed keeps printing money/digits and giving to the SAME TRIBE MEMBERS!!!
Why? Simple, BECAUSE THEY CAN and it is indeed a fucking club!!
Like all FASCIST systems, the is and always has been about maintaining POWER AND CONTROL over real resources, including the most prized asset - SKILLED HUMAN LABOR
Power and control is NEVER simply given up. Until everyone stops accepting their bullshit paper/digits in exchange for their labor OR all the bankers and financiers lose their fucking heads, NOTHING will change. It has been this way since the dawn of man. Evolve or die motherfuckers...
The end result of zirp will be nirp. There is no going back, the problem for elites is how do you pull off nirp and or collapse? Easy...a war which will be started by a false flag to blame it all on. The next currency or world currency will be in the form of a more sinsiter mechanism known as SDR.
All this financial engineering is needed to keep the asset prices of the .1% propped up because globalization is deflationary and has been a huge failure.
Infinite growth in a biosphere with finite physical resources is impossible. Survival of the fittest and such...
Humankind does indeed evolve... ...individual humans or angry mobs, not so much.
Fuck you Fischer you fucking cunt!
IF I ever see him on the street I will run up to him and kick him in his front butt. Asshole.
No oversight from elected officials
Debt just collapsing under its own weight. Capital isn’t destroyed, it sits in the FED excess reserves drawing interest for the banks. Since Capital isn’t being loaned out, fractional money creation isn't occurring, so hence we are witnessing deflation. Am I missing something here?
No. However, with 7+ billion people (and growing) all competing for the real resources and energy that make a better quality of life possible, there is no deflation in anything that is required for a high standard of living. My best guess is that the Fed is defending the dollar to the death. The destruction of the dollar's purchasing power has been ongoing... ...exponentially since 1971 when the last PHYSICAL connection between the money supply (controlled by bankers and financiers) and REALITY was severed. Do you really think just because people don't have money (no fractional money creation) that they will not EAT (consume resources) or turn on the heat (consume resources) or go to the hospital (where the doctors are forced to care for them). Don't be such a douche.
Look at the GLOBAL money supply, look at derivatives, just because the majority of those PAPER CLAIMS have not found their way to main street does not mean they won't. All stimulus is fungible and eventually everyone says "FUCK YOU, PAY ME!"
All those paper claims will start seeking out real assets eventually.
"... if asset prices across the economy ... are thought to be excessively high,
raising the interest rate may be the appropriate step. "
BINGO... open admission... "we fear gold might break to
the upside, so we are moving to push it down." ... in so many words ;)
"even a very shallow path of rate hikes might drive the real Funds rate
well above the short-term equilibrium real rate, further depressing demand."
Nice B.S. but this translates to "its more important to payoff the welfare
cases than protect the person and their private property" That is only true
for the "community organizers" that might get elected. Everyone else
should recognize that as a "get outta Dodge" signal.
BTW, y'all do realize that quote #1 is in direct conflict with quote #2 ???
And the FED is on #1's side... in more ways than one... LOL...
@Freeshitter, how will SDR effect my EBT card?
You are a useless eater by definition, so it wont matter by then.
about now everyone is a useless eater including you stupid. Free shitter or shit on my face shitter?
about now everyone is a useless eater including you stupid. Free shitter or shit on my face shitter?
about now everyone is a useless eater including you stupid. Free shitter or shit on my face shitter?
If the FED does go to NIRP, then owners of US treasuries will get HUGE capital gains - again, as we did after ZIRP & QE - Thank you FED :-))
Correct. However. That is not a profit until you SELL. My prediction is that the banker's puppets in D.C. will place restrictions and or new taxes on selling/trading government paper (just like China).
Let's see how many years the oil "glut" lasts. Something about slitting the throats of people/corporations that actually deliver useful products is very unsettling. Trying to figure out the best hedge as I'd like to think Kyle Bass is correct this time...
of course, conventional war still consumes a lot of oil...
LOP,
when you figure out the best hedge, please discuss it with us.
I am also thinking this out. Oil futures? ETF? Buying oil producing and oil related companies?
America is still importing over 7 million barrels per day...
https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbblpd_m.htm
How can there be a "glut" if we are still importing that much oil per day?
1.2 million per day from the Saudis...
over half from OPEC countries...
IMO, the destruction of price discovery will have dire consequences in this case...
US Treasuries are the foundation financial asset of the global monetary and financial system, therefore they cannot place any limits on selling US treasuries because maximum liquidity in buying and selling and lending them is too essential to operation of the global financial system. There are ALWAYS a huge range and number of buyers for US treasuries, private parties like me selling them presents zero problems for the regime.
Zero risk of any limitations on selling, makes zero sense.
The Fed said they'd raise rates but rates haven't moved. Either the market is bigger than the Fed or the Fed is scared. Same result either way.
+ 1
The last paragraph gets it right on demand destruction.
The Fed (and a/o central banks) are right to examine the effects of their policies as in elevated asset prices. The question is why and an examination of the unintended effects. They should also be more forthcomeing in the limits of their abilities. Also, stupid goals like "full employment" or a 2% inflation rate are silly. The USSR had official full employment, only no one really worked. The key phrase was, "You pretend to pay me and I will pretend to work."
The housing market is nearly completely dissociated from the economy. The economy and incomes are flat ergo housing prices should be flat following the bubble burst. Home prices are accelerating along with rents, as documented here on ZH. It is completely absurd.
You also have invisible things like Obamacare dramatically increasing medical insurance costs for millions without any more real healthcare output. This is an invisible drag because it will not show up in reduced incomes, which is the practical effect. It will not show up inflation which is more or less what it is. It will go to GDP because it is an expenditure which is how GDP is calculated.
Where I live I can see roughly the same forces forming as the last bust. Home prices are climbing rapidly. Homes are being built in the wrong price ranges. There is not enough cash in the middle class for large down payments and real estate agents are back on the path of forever-growth.
The Fed has one real option and only one which it will never do. It should set rates free and let the market rebalance. Most of us can guess why but a large part of it has to do with government debt.
anyone using capital to make a yield and convert that income to consumption is going to limit their consumption or lose principal.
capital gains from bond appreciation assumes you can reinvest the proceeds net of CG taxes at another level of yield and be ahead - i dont see how that is possible over the intermediate term.
Corporations in deflationary period cant raise prices easily especially with no tariffs for protection so as volume and prices contract they get rid of overhead primarily labor which accelerates the consumer decline unless they have monopoly position for offset to volume effect
create wealth in the stock market ? with PE's already high in the face of declining sales ?
i dont get it
It's all make believe -- Let's pretend that the FED hasn't painted itself into a corner and has infinite room to ease via negative rates, QE and helicopter money. Oh yes, I forgot -- Gold is really just another worthless commodity.
He brings up the gigantic non-sequitur of programming for NIRP. But the MMF problem is real. And while Europe is busy "rewriting" poorly written economics textbooks, let's not forget that most of the European banks have their money in US dominated MMFs. So what is the effective interest rate in Europe if the money is in the US with a strengthening dollar scenario? It's not negative.