Is The Fed "Seriously Considering" Negative Interest Rates?

Tyler Durden's picture

The Fed may "seriously consider" negative rates after moving rates back to zero, reintroducing forward guidance and making "stronger pleas" to Congress for fiscal policy action as there are complications for money markets, according to BofAML strategist Mark Cabana.

This would not be a total surprise as Mises Institute's Joseph Salerno warns recent Fed commentary suggests they want to test-drive negative interest rates...

In 2016, the Fed's annual stress test on banks will include a scenario in which the interest rate on the three-month U.S. Treasury bill becomes negative in the second quarter of 2016 and then declines to -0.5%, remaining at that level until the first quarter of 2019.  According to the Fed, "The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities."  In other words, including this scenario in its stress test is not supposed to signal that the Fed is contemplating adopting a deliberate policy of negative interest rates.  It is simply testing the resilience of big banks in the face of  a severe recession that precipitates a "flight to safety" which spontaneously drives rates on short-term Treasury securities into negative territory.  Or so they would have us believe.

Recent remarks by those associated with the Fed, however, seem to suggest otherwise.  For example, former Fed official Roberto Perli, now a partner at Cornerstone Macro LLC, commented "It doesn’t signal anything" about future monetary policy, but then added, it is "another sign that the Fed would not be entirely adverse" to reducing its target rate below zero if economic conditions should warrant.  In mid-January, New York Fed President William Dudley denied that policy makers were "thinking at all seriously of moving to negative interest rates."  However, he conceded, "I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action."  Most tellingly, just this past Monday, Fed Vice Chairman Stanley Fischer gave a talk to the Council on Foreign Relations in New York in which he approvingly discussed negative interest rates in some detail.  Because a speech by a Fed Vice Chairman sometimes turns out to be a bellwether of a radical shift in monetary policy--recall Bernanke's infamous speech on deflation and unconventional monetary policy in November 2002--Fischer's remarks are worth quoting:

[W]e believed that we could not get interest rates to go below zero. Well, it turns out that . . . four European and one Asian country have now done that. And how can you do that when currency has a zero rate of return? You can do it because it turns out that holding currency is not so easy. If you’re going to keep your billion dollars in currency, you’re going to have to find a place to store it, you’re going to have to insure it, and you’re going to have to have it guarded. And by the time that’s done . . . zero is no longer the lower bound. All those costs are the lower bound, and those costs seem to be significantly below zero in the sense that we have a Denmark and one other country having a negative 75 basis point interest rate, which worked. . . . So that idea is there. And that’s what they’re pursuing. And, you know, everybody is looking at . . . how that works. . . .  [W]e have actual experience of countries that have used negative interest rates. . . . Countries that have used it continue to use it. They haven’t given it up. . . . So it’s working more than I can say that I expected in 2012. . . . 

And, lest we forget, Fed Chairman Yellen went on record as conditionally favoring negative interest rates as President of the Federal Reserve Bank of San Francisco in 2010: 

If it were positive to take interest rates into negative territory I would be voting for that. 

Of course, as we noted previously, NIRP in America is becoming more inevitable...

When stripping away all the philosophy, the pompous rhetoric, and the jawboning, all central banks do, or are supposed to do, is to influence capital allocations and spending behavior by adjusting the liquidity preference of the population by adjusting interest rates and thus the demand for money.

To be sure, over the past 7 years central banks around the globe have gone absolutely overboard when it comes to their primary directive and have engaged every possible legal (and in the case of Europe, illegal) policy at their disposal to force consumers away from a "saving" mindset, and into purchasing risk(free) assets or otherwise burning through savings in hopes of stimulating inflation.

Today's action by the Bank of Japan, which is meant to force banks, and consumers, to spend their cash which will now carry a penalty of -0.1% if "inert" was proof of just that.

Ironically, and perversely from a classical economic standpoint, as we showed before in the case of Europe's NIRP bastions, Denmark, Sweden, and Switzerland, the more negative rates are, the higher the amount of household savings!


This is what Bank of America said back in October: "Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain."

Bingo: that is precisely the fatal flaw in all central planning models, one which not a single tenured economist appears capable of grasping yet which even a child could easily understand.

This is how Bank of America politely concluded that NIRP is a failure:


For now, negative rates as a policy tool remain a “work in progress”, judging by the current inflation levels across Europe. But the rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging, and are buying back bonds not stock.

One can now add Japan to the equation.

And soon the US, because as the chart below shows, the Fed has likewise dramatically failed in shifting the liquidity preference of US investors. First, here is what Bank of America finds when looking at recent fund flows:


4 straight weeks of robust inflows to govt/tsy bond funds; 19 straight weeks of muni bond inflows; since 2H’15, cash has been the most popular asset class by far ($208bn inflows – Chart 1) vs a lackluster $7bn inflows for equities & $46bn outflows from fixed income (dogged by redemptions from credit)

And here is the one chart which in our opinion virtually assures that the Fed will follow in the footsteps of Sweden, Denmark, Europe, Switzerland and now Japan.

Since the middle of 2015, US investors have bought a big fat net zero of either bonds or equities (in fact, they have been net sellers of risk) and have parked all incremental cash in money-market funds instead, precisely the inert non-investment that is almost as hated by central banks as gold.

To Yellen, this behavior will have to stop, and she will make sure it does sooner rather than later. Just ask Kocherlakota.

Will this crush money markets as we know them, and unleash even more volatility and havoc around the world?

Absolutely. But at this point, when evey other central bank has lost credibility, to paraphrase Hillary Clinton loosely, "what difference will it make" if the Fed joins the party on the central bank Titanic?


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Victory_Garden's picture

Of course they are!

It's da plan, boss.

Soul Glow's picture

But they want to ban cash first.

knukles's picture

Yes they are.  Bill Dudley openly said so. 
Who the fuck's not listening?

Further, NIRP is an entirely fungible economic condition, exactly like a fungible commodity.  For a country to inject reserves into their banking system, they need to purchase assets.  Usually debt.  They can purchase anybody's debt.  Works the very same.
And you all thought Ebola was a global pandemic risk.  Y'all ain't seen nuffin' yet.

Green Shoots motherfuckers!  Recovery!  Job growth!  Whatever! 

Gotta admit guys and gals, all the news this last week or so has been exceptionally good....
.... for Gold and Long Treasuries

I love the smell of burning napalm in the morning

Squid Viscous's picture

some random kikes were floating the idea on Bloomturd last august or sept. that's when I knew it was only a matter of time...

AldousHuxley's picture

Kocherlakota  is no longer at the Fed

Bailout czar Kashkari took over after failed bid as governor of California.

His career consists of being a patsy of wall st. NASA engineer turned financial engineer, presented a "minority" face to congress as Treasury Secretary Paulson asked for billions with no string attached. Then he worked for PIMCO as they expanded from a bond house into equities. As the risky venture into equities didnt' turn out, he was let go after making $500,000 PER MONTH. Now he is at Minneapolis Fed (while residing in Laguana Beach California)....


Financial Elites must have plans for this patsy to do the dirty bidding....such as negative rates and QE4.



MalteseFalcon's picture

NIRP isn't happening. 

It's a bluff.

NIRP means the end of the dollar.

The Euro can fail.

The Yen can fail.

Yomama can fail.

The Dollar cannot.


KnuckleDragger-X's picture

Do it, do it now! I double dog dare ya to go NIRP!

LawsofPhysics's picture

Yes, and NIRP can work if a SINGLE country is honestly REFORMING it's monetary system. Unfortunately, all of the EARTH's central bankers/financiers want to do it.

That is in fact GLOBAL WEIMAR.

The unintended consequences of this are going to be a real motherfucker and on a scale the world has never before seen.

daveO's picture

Japan will be the first domino to fall, imo. The banksters will then lock down all those 'savings', in the above charts, so that people can't access them. Almost anything will look better. 

SoilMyselfRotten's picture

That is in fact GLOBAL WEIMAR


Almost like it were part of the plan, hmm...

lesterbegood's picture

The intended consequences will also be unpleasant.

Winston Churchill's picture

Maybe its me ,but I can't see how the world GRC can have NIRP without causing

the deflationary spiral they're desperately trying to avoid .

Lady Jessica's picture

Maybe they don't really want to avoid it?

lasvegaspersona's picture

maybe they want to avoid it but can't...

Most here agree that the problems of the monetary system cannot be fixed. But then they get confused when something is tried that we know can't work. Think of Captain Smith of the Titanic. Even though the ship was going to sink he surely felt the need to do something. I'm sure he did give orders as useless as they were. Even though the situation is hopeless you gotta do something...right....?

Lady Jessica's picture

I very much suspect that, contrary to orthodox opinion, decreasing interest rates cause deflation.  There is no empirical to the contrary.  

Either they know this and intend deflation.  Or they don't and they're not as smart as they think they are and should not be managing our central banks (arguments against central banks notwithstanding). 

FrankieGoesToHollywood's picture

I am not sure how printing money out of thin air to buy any and all debt to force rates negative results in deflation.  But I am listening.


EDIT:  but I will acknowledge there will be a difference in the rates paid on gov debt (negative if FED buys everything) vs rates you and I pay for everyday transactions (positive rate).  Its like the prime rate vs what we have to pay.

daveO's picture

In NIRP, savers will avoid banks even more. It's why they banksters are talking about banning cash. NIRP also, just as importantly, forces savers to take the loss to subsidize banks. Lower savings deposits = lower loans(deflation). The total debt/fiat will still be maintained or increased(inflation) as the FED buys up more US Treasury(at some point corporate?) issuance to paper over the difference, like they've done since 2009(US debt doubled). This is an ongoing hostile takeover of our gov./economy disguised as banking bailouts.

NEOSERF's picture

When you have no wage growth and are shifting debt on consumers from private (banks, credit cards, school, auto loans) to government (taxes), you want people to pay down the first tranche above so they can start paying down the second (public debt) group through higher taxes.   A deflationary environment would seem to be supportive of this transitionary period.   If they can't pay higher taxes but you impose them anyway, you get Tea Parties and pitchforks....the 1% don't want that.

LawsofPhysics's picture

With over 7+ billion souls (and growing) all competing for the finite resources required to maintain a high standard of living, "deflation" is a fucking myth.

Such "monetary phenomena" are irrelevant when the underlying currency is no longer accepted....

I see a lot of arrogant fucks out there with massive piles of paper promises they recieved without having to provide any real work in exchange...

Forget the average sheeple, they are and will always be cannon fodder.

At this point I am waiting for the criminal fucks in banking/finance/politics to proclaim "fuck you, pay me!" and start sending all that paper/digits in search of real assets...

FrankieGoesToHollywood's picture

I don't see how NIRP is deflationary.  In order to get NIRP, they must buy massive amounts of debt, they will start with Federal debt and if that is not enough, buy other debt.  In a market which there is massive demand, supply will respond.  Fedgov will start spending hand over fist (more than they are now) and corporations will start issuing debt too.  I mean why not, you get FRN now for your promise of less FRNs in later.  

Now with lots of cash (excuse me, digital digits) in congress' hand, what will congress do with it?  spend it.

LawsofPhysics's picture

Yes, again with the caveat that all monetary phenomina are only relevant to currencies that are still accepted...


Yes,  ...first the "deflationary collapse" followed by the ...

I think we may be near the end of the "deflationary" period...

Kirk2NCC1701's picture

Just remember that you heard it from me first:  They will "Ban Cash" in steps, using the Boiled Frog tactics.

First, just like in the EU, they will cap the max cash you can withdraw per day, and cap the max size of cash transactions.  Eventually, they will ower the cap over time, using the same Boiled Frog tactics.  They did the same shit with Income Tax a hundred years ago, when it started out as "temporary" and at 1%.

Which is why you'll need to start building that Cash Stash domestically, and abroad if possible.  I'd imagine that you'll still be able to buy a new car in cash, if you pre-pay it in installments, i.e. on the old-fashioned Layaway Plan.  Also, if I were to sell property, I'd definitely settle in a cash-gold combo.  That way, the official sales price is shown in the USDs/cash portion (to lower property taxes and realtor fees), and the non-monetary portion would be in Gold (since AU is not Legal Tender).

Victory_Garden's picture

Cheers, Kirk.

Long so long has the plan been to eventually go to the electronic-money-god(AI) so they(the babylonians) can tax, trace, and monitor every single digit of value that every single soul would use to transact in any global financial situation.

Of course the only thing is, the plan also includes an elimination of 99% of humanity before this happens, so they do not have as many resistors to the only system of monetary trade that is left after the hollow-cost is over, and nothing with two or four legs walks on the face of the earth for say 10,000 years, or so.

Mr.BlingBling's picture

In Newspeak, a Layaway Plan is "structured deposits" which is . . . . . . a federal crime!

NotApplicable's picture

Thanks, to Ron Paul, Gold and Silver Eagles are legal tender.

chubbar's picture

Of course they are going to try to ban cash. Notwithstanding that little fairytale about a billion dollars in cash having to be guarded, therefore removing the zerobound for investors who (insinuated) may as well park that money in a bank at negative interest and therefore remove the risk of theft. Anyone with a billion dollars now knows that the FED intends to bail in banks and that any deposits are no longer safe. The main risk of theft is from the FED and it's banks! Also, that the fucking derivatives have now taken priority in a BK over deposits so that isn't going to fly either for anyone with common sense.

These fucktards must think they are talking to kindergarteners when they come out with this shit. Billionaires aren't parking their fucking money with you fuckers because they know you just want to rip them off. The second the money markets break the buck, they are going to be a dot in the sky with all the dough they can squeak back out of your clutches. 

This is going to be some kind of fun watching this shit show. I don't think the idiots in the US gov't have the time before this comes to a head to do the proper ground work in order that the US citizenry accept a cash ban. So that's effectively off the table.

migra's picture

If they want everyone in the country to pull al of their money out of the banking system then go right ahead you big fucking dummies.

migra's picture

If they want everyone in the country to pull al of their money out of the banking system then go right ahead you big fucking dummies.

Father Thyme's picture

KIRP           DIRP

(K for Killer, D for Deadly)

indygo55's picture

So the idea is that we are not supposed to save for a rainy day or for retirement or for any reason. No saving. And if we HAVE saved over the years we are supposed to spend it. 

What the fuck is NOT obvious here? We are being stripped of our assets. We are being harvested. I am ready to stand up. Who is with me?

Arnold's picture

You are supposed to risk them in equities,bonds or real estate.

All three investments loosing value in large parts of the country..

dimwitted economist's picture

solid proof that anyone saying the u.s. economy

is not doing well is Fucking CRAZY!

thank you president obama!

I woke up's picture

Incrementalism of news releases on the topic of NIRP, it's coming here and they are subtly letting everyone know

NotApplicable's picture

TINA told me, so it has to be true.

Lady Jessica's picture

As soon as they make an official denial we'll know.

bullet's picture

negative fed paychecks and pensions if rates go negative... so they can eat the same shit they want to feed us...

daveO's picture

Dream on comrade! Those parasites will get paid via increased US debt issuance, thus further enslaving the US taxpayer. Feel the Bern!/sarc

Chupacabra-322's picture

There's no "considering." They've already decided. Only question is, before or after the Selection / "Election." The Scum Fucks are running out of time.

roisaber's picture

There's something perversely fascinating about watching these bankers take slow, careful, deliberate aim at their own feet, and then gently squeezing the trigger.

conraddobler's picture

Oh if that were only true.

It's not what the world looks like now it's the sell job for the new world that I'm worried about.

This one is fubar but never ever think it can't get worse, just when you think that, it does.

LawsofPhysics's picture

If the bankers and financiers want to destroy the only thing they control, the FRN, and shoot themselves in the fucking head, I say, LET THEM!!!!!

Temporalist's picture

Hello I am a Fed representative and I'd like to make it clear how we operate.  First we print lots of money that we give to our rich entitled friends so they can live lavish lifestyles and look down on the serfs.  Also we connive and scheme and bribe legislature and govt. flunkies to do our bidding (with our ex nihilo fiat) and even those that can't be bought we lie to because they think we are "the smartest guys/gals in the room" and that we have everyone's best interest at heart.  Then we build massive bubbles just so we can "save" everyone when they pop and cause massive economic destruction.  When we bail out the criminals who are immune to prosecution by giving them more free money that we printed we then punish the everyday mom and pop savers so they are forced to put money into the very institutions that we "saved" so that they can then lose it all again when we pop the next bubble we just created.  Of course we must punish the criminals, that we bailed out by giving them so much loot, and that will come in the form of negative interest rates.  We can't just give them free money for free without making it look like we care can we?  In conclusion, see you at the next doomsday device explosion we have set to destruct which will always be bigger than the last.

wildbad's picture

oh, its not just a conspiracy theory?

knukles's picture

Nope.  There are no "Conspiracy Theories"