The Fed Is Preparing For Negative Rates - Here's The Sign Everyone Missed

Tyler Durden's picture

Submitted by John Mauldin via MauldinEconomics.com,

I think it’s possible that the Fed will push rates below zero when the next recession arrives.

I explained why a few months ago in my free weekly column, Thoughts from the Frontline, at Mauldin Economics.

In that regard, something important happened recently. And not many people noticed. I’ll do a quick review to explain.

In Congressional testimony last February, a member of Congress asked Janet Yellen if the Fed had legal authority to use negative interest rates. Her answer was this:

In the spirit of prudent planning we always try to look at what options we would have available to us, either if we needed to tighten policy more rapidly than we expect or the opposite. So we would take a look at [negative rates]. The legal issues I'm not prepared to tell you have been thoroughly examined at this point. I am not aware of anything that would prevent [the Fed from taking interest rates into negative territory]. But I am saying we have not fully investigated the legal issues.

So as of then, Yellen had no firm answer either way.

A few weeks later, she sent a letter to Rep. Brad Sherman (D-CA). He had asked what the Fed intended to do in the next recession and whether it had authority to implement negative rates.

She did not directly answer the legality question, but Sherman took the response to mean that the Fed thought it had the authority. Yellen noted in the letter that negative rates elsewhere seemed to be having an effect.

(I agree that they are having an effect; it’s just that I don’t think it’s a good one.)

Yellen’s claims are a clear sign the Fed is prepared to dive

Fast-forward a few more weeks to Yellen’s June 21 congressional appearance. She stated that the Fed does have legal authority to use negative rates but denied any intent to do so.

“We don't think we are going to have to provide accommodation, and if we do, [negative rates] is not something on our list.”

I’m concerned about the legal authority question. If we are to believe Yellen’s sworn testimony to Congress, we know three things:

  1. As of February, Yellen had not “fully investigated” the legal issues of negative rates.
  2. As of May, Yellen was unwilling to state the Fed had legal authority to go negative.
  3. As of June, Yellen had no doubt the Fed could legally go negative.

When I wrote about this in February, I said the Fed’s legal staff should be disbarred if they hadn’t investigated these legal issues. Clearly they had.

Bottom line: by putting the legal authority question to rest, the Fed is laying the groundwork for taking rates below zero.

I’m sure Yellen was telling the truth when she said in June that the Fed had no such plan. But, plans change.

The Fed says it's data dependent. If the data shows we’re in recession, I think it is very possible the Fed will turn to negative rates to boost the economy.

Except, in my opinion, it won’t work.

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JamaicaJim's picture

President Trump will take care of this shit...

Janet...you're fired.

wee-weed up's picture

 

 

"when the next recession arrives"

He's kidding right?

SomethingSomethingDarkSide's picture

"Those boots were made for waddling, and that's just what you'll do!  When I fire your ass and kick you out, you'll faceplant in that spew"

Beam Me Up Scotty's picture

Why take rates negative?  Just print the money you need to keep the Stawk market levitated.  No one can audit the Fed anyway, so in Hillary's terminology---"what difference does it make" how much money they print?  They don't have to tell ANYONE how much they have created out of thin air.  So why risk bad public perception over negative rates??

GadExp's picture

Nothing the power people do makes any sense whatsoever unless you get a full perspective of their plan....

 

Here's a piece of the puzzle for you (notice the date on the "new world currency" coin):

 

https://socioecohistory.wordpress.com/2014/07/26/flashback-1988-get-read...

Beam Me Up Scotty's picture

Economic/monetary integration has worked well for Europe, hasn't it!!  Just ask the Greeks!!

 

 

/Sarc

DontGive's picture

I'm excited for NIRP.

Maybe they will start paying me to borrow!

Boris Alatovkrap's picture

You are generally misunderstand nuance of negative interest rate. Negative interest rate is bond that is cost more than maturity value - is safest place for storage of wealth when all other instrument is toxic deadly. No bank is pay to give away loan, is charge whatever is market based on factor like risk. Of course, bank lend to consumer and Fed Open Discount Window lend to Bank are not corollary, so Fed can print money for member bank anytime.

… but what is Boris knowing!?

Stainless Steel Rat's picture

I'm with Scotty... stealth stimulus all the way.

McCormick No. 9's picture

I think they'll go negative just for the mind-fuck. You know, the old, "You are too dumb to understand economics. Let the experts handle it, etc." I have to admit, Boris' explanation of negative interest rates makes the most sense. Sure, I'll buy a treasury and be happy to get back less than I paid for it, because all the other options mean I'll lose even more. We live in a fucked-up world. But isn't it funny that the very people who fucked everything up get to now borrow money (bonds) from us and WE pay them interest for the privilege. You can't make this shit up.

Aristotle of Greece's picture

It's high time the Fed realizes that Money itself has become the Problem. https://goo.gl/IoiSjv

LawsofPhysics's picture

Yes Boris, unfortunately, all stimulus (even FREE MONEY to primary dealer bank from Fed) is fungible. NIRP works when one small country is doing it, not the entire planet.  If the entire planet does this then all those paper claims will indeed start seeking out real assets exponentially faster.

Global Weimar comes much faster...

If the global banking cartels want to commit suicide faster, I say let them...

Buckaroo Banzai's picture

The Fed is the tent pole for the global financial system. The only way the tent stays up is if the Fed maintains positive interest rates. The Fed tent pole is what affords other central banks the ability to maintain negative interest rates. The Fed is quite happy to make you believe they will go negative, but they know they never can because if they do, the entire global financial system must collapse.

Hohum's picture

A very interesting point.  Maybe the alternative is the Fed has to remain less negative.

Sparkey's picture

I up voted you Buckaroo, I don't know if you are right, but you certainly could be right, and I fear you may be right,, we are in an aweful way aren't we? to my mind, negative rates will destroy everything, that is the death knell for the US economy and probably the whole World.

McCormick No. 9's picture

Has anyone, ANYONE, ran this whole thing to its logical conclusion? If all government bonds go negative, and the only thing, the ONLY thing that makes such a bond attractive is that it is the safest place to put your money, all anyone has to do is create a bond that pays a nominal rate of positive interest and is safer than a treasury, and the world will beat a path to that bond's door.

Someone smarter than me help me out here. Does this mean that the globalists are inherently invested in broad-based chronic instability (heightened risk)? Could it be possible that ISIS, the banking crisis, etc, has to perpetuated in order to make NIRP work? If this is at all logical, it is the epitome of "beggar thy neighbor".

We are so fucked.

Econogeek's picture

Why?  And with what kind of lag?  

If the Fed goes negative, why would the absolute level of the rate - negative - matter more than its spread to the debt price deflation?  If everyone is negative in a debt deflation, you still want to buy the cleanest dirty shirt.  If everyone is losing money, you just want to lose less than everyone else.

I think it's a collateral problem, as ZH has taught us over the last few years.  When there's no supply at any price, enter the re-set.  Until then, seems to me that the Fed could go (maybe slowly) deeply negative, even, as long a enough money types still Believe In The System, which means as long as the CBs are gushing money to the banks.

Great metaphor about the tent pole, but I don't understand why the Fed's absolute rate, and not (relative) spreads, will cause a collapse.

LawsofPhysics's picture

NIRP by the Fed would undermine the only thing that they really control, specifically the Federal Reserve Promissory Note.  The Fed will let other central banks go negative, but they won't.  Why?  Simple, because as the rest of the world's central banks go negative the Fed knows that people all over the world will rush to the "safety" of US Debt and, more importantly FRNs...

The only thing that could muck it up is if the rest of the world ran to the safety of something else...

something else that would preserve and protect their savings...

I wonder what could do that?

Bush Baby's picture

They will do whatever they can do to perpetuate the process, be that negative interest rates, inflation, helicopter drops, WAR, whatever.

It will not stop until forceably made to do so.

Should Trump win and somehow manage to stop the shitshow here, it will just pop up somewhere else.

 

I guess that's why their rush to Globalism is so urgent.

One Govt, One currency, one stock market, you can print till the cows come home.

LawsofPhysics's picture

Yes, unfortunately, a rush to globalism now is a rush to Global Wiemar.  The planet's debt is still there and this is the fundamental problem.

sessinpo's picture

Well the idea is make it an incentive for banks or businesse or whomever to actually take the money they have and use it, put it into the economy. Just printing money is just that. It doesn't mean that money actually gets used. They could print me $1 trillion tomorrow and I could just let it sit in a vault somewhere or on some ledger. But if I am not being charged because of nirp, I might  have an incentive to use that money.

Well, that is their theory anyway. I tend to agree that the negative consequences will occur such as it makes it more valuable just to have debt rather then actually be productive and profitable.

explosivo's picture

Why take rates negative? To keep the bond market afloat a little while longer. There is already no yield on treasuries but everyone knows they can front run QE and make profit on the interest rate declines. So no panic selling yet. However, interest rates have to keep going down even if that means going negative for the ponzi to survive another day. 

GadExp's picture

Clarification: When I say not everyone missed this sign, I mean that everyone who is paying careful attention sees these things as they happen and sees then for what they really are.  (Not the stupidly arrogant "I'm smarter than everyone" interpretation :)

 

A huge divide has occurred in the world - those who see and understand what the power people are doing, and those who are being duped.

 

 

OpTwoMistic's picture

They cannot go to negative. The only remaining prop for the dollar is bonds.

Negative means no market for bonds, end of dollar. The fed cannot buy all of them.

phatfawzi's picture

no in denial, thats how democrats live with the decisons they make. 

Dr. Richard Head's picture

Some of the core numbers out there during this "recovery" have been the worst for the most consequtive months greater than any other recession the US has experienced.  If this is the recovery...

https://www.youtube.com/watch?v=4n2MyajIj10

Peter Schiff's recent analysis of Yellen's rate hold. 

sessinpo's picture

They are in the wrong business. They should start opening bars. They'll have a lot more job opportunities to offer then.

Cautiously Pessimistic's picture

I believe he is referring to a 'double seasonally adjusted recession'.

JamesBond's picture

So he didn't see the 'recessions' coming either?

Kirk2NCC1701's picture

It's a Recession if you worry about keeping your job and have a tough time paying the bills.

It's a Depression if you don't have a job.

ArkansasAngie's picture

That is a bridge too far

 

lasvegaspersona's picture

The problem, at this point is not the Janet or the Ben or even the Alan...it is the dollar. The rest of the world is done with supporting it (by buying paper dollars and taking them out of circulation). The world is not ready to admit that all paper is bad but eventually as all those dollars bid gor goods we will get the inflation that reveals the size of the mess.

Trump can't fix it cuz no one can.

Buy gold. Hide it. (for safety sake send me the map to where you burried it.)

WakeUpPeeeeeople's picture

When it gets to the point that gold/silver is needed for day to day living then ammo should be worth about 10x its weight in gold.

Canadian Renegade's picture

Ammo is already a good inflation hedge. At least in Canada it is. Pretty much every caliber costs more then double what they were 10 years ago. 22 is about triple.

adanata's picture

 

The 'dollar' is indeed a problem and, yes, the rest of the world is trying to get out from under it as quickly as possible. That's the plan as the entire global fiat system is being deliberately scuttled to create the need for a 'global currency'. However, Janet, Ben and Alan are the Roths minions making it happen so I wouldn't discount them as 'problems'.

The Ram's picture

Fortunately or unfortuantely as the case may be, the global currency will default to the dollar.  Of course, a few well armed countries in the world could say 'fuck this' and reject the dollar, but they better be ready to shoot back as these chumps are playing for keeps.   It's really a matter of whether the rest of the globe wants to hitch their wagon to a failing and indebted US or fight for a possible future for their people from the US petrol dollar hegemony.  

sessinpo's picture

Totally agree. But we need to get rid of these monetary agitators otherwise known as the frb.

My PMs are buried at 1600 Pennsylvania Ave NW, Washington, DC 20006. Could you possibly go check on it for me?

If you have any problems, my phone number is 867-5309

Kirk2NCC1701's picture

Yup, agree. Will only add that if you have a job and mortgage, to do a refi.

This will reduce your finance cost, and improve your monthly cashflow.

Also, if you're worried about your job, use the savings from the refi, to pay for the Mortgage Insurance.

If your CFP didn't tell you this, you should fire him/her and send Kirk a Thank You note.

Farqued Up's picture

My biggest negative against Trump is his silence on the Fed. If this country weren't about to totalitarianate I wouldn't vote but I'm forced to vote for him, Clinton is Stalin with a clit.

This country will never rise from hell until that private FRB Creature is stomped into oblivion. Trump is like Perot, "we"il just lift up the hood and fix it, Larry". Wrong, D'Artagnan, it isn't fixable with sophisticated legal looters with their clutches on the nation's currency. It has to be eliminated and backed by gold at some price of gold. That is the only solution, IMO. Trump is silent, I'm hoping that he is just laying low to avoid frightening the dumbed down populace.

DrewJackson's picture

Trump is targeting the masses.  The masses are clueless about the Fed.

Hohum's picture

Sure it will work.  The media told me central bankers are heroes and heroines.

Davy Crockett's picture

> The media told me central bankers are heroes

They do have the courage to act.  Goddamn courageous heroes.

 


TradingIsLifeBrah's picture

Who missed it, has anyone seen US stock prices* lately?

 

*The word "Market" was intentionally excluded from statement

Condition 1SQ's picture

Kill the savers, kill the savers, kill the savers, kill the savers ..

Beam Me Up Scotty's picture

Yes, and most of the so called "savers" are the older people who are living on fixed incomes and Social Security.  They can't get any interest income anymore and Social Security is eating them alive because they aren't getting any COLA's to offset the real inflation rate.  Yet they vote for Hillary.  And she is the champion of this Fed bullshit world we are in right now.

Boris Badenov's picture

How can a pension plan possibly build assets for the future with negative rates? Won't pension plans and insurance companies be harmed by this?

CorporateCongress's picture

Of course. But don't worry, tptb never cared about any of that anyways