Janet Yellen's "Footnote 8" - The Negative Rate 'Smoking Gun' That Everyone Missed

Tyler Durden's picture

Submitted by John Mauldin via MauldinEconomics.com,

Yellen’s Jackson Hole speech was widely reported, so I’ll spare you the summary.

What wasn’t widely reported was her Footnote 8. Yellen cited approving a mathematical formula that could put interest rates on autopilot. The Fed hasn’t yet followed the rule, but its presence in Yellen’s paper suggests its use is on the table.

Footnote 8 lays the groundwork for negative rates

For Yellen to adopt any fixed rule would be a major strategy shift. She has declined to use the so-called “Taylor Rule” favored by some economists, claiming the Fed should be flexible but “data-dependent.”

The rule described in Yellen’s Footnote 8 uses variables like core PCE inflation, the Fed’s inflation target, and the unemployment rate to calculate an optimal Federal Funds rate target. If the Fed had been following the rule during the last recession, they would have dropped rates to -9%.

Yes, you read that right, -9%.

As a point of reference, the ECB right now is at -0.4%. Europe is now experiencing all kinds of bizarre consequences.

Yet, here’s our own Fed chair bringing up a method that would send rates far lower.

To be fair, Yellen didn’t say she endorses this idea or wants to adopt it. She concedes it would have been impossible to drop rates that far in 2008.

So why even bring it up?

A generous interpretation: Yellen wanted to demonstrate that the Fed’s control over interest rates has limits as a tool for stimulating economic growth. And in her speech, she does go on from there to talk about other policy tools.

Still, it was no accident that she mentioned the rule for autopilot rates. This was another in a series of small nods to the idea that negative rates might be appropriate in some situations.

The Fed’s muddled assumptions

The Yellen Fed’s mental status gets clearer every day. They think that their crazed ideas—ZIRP, QE, Operation Twist, and the rest—are what brought the economy back from the brink of collapse. Last December’s one-and-done rate hike was the victory lap. They think everything is fine now and have turned their attention to preparing for the next recession.

But, this thinking is completely wrong. Yes, the economy did recover (slowly), but it did so in spite of the Fed. Not because of anything the Fed did.

The Fed’s base assumption, as I explained in "Six Ways NIRP Is Economically Negative," is that making interest rates go down will stimulate demand for goods and services. That is true on the margin. It is not true always and everywhere.

It’s especially not true for non-bank private businesses and consumers. To them, interest rates are one of many costs… and not necessarily the most important. On the other hand, interest income is very important to this group.

The Fed is banker-driven

Bankers think differently. This matters because bankers have the most influence on Federal Reserve policy. To them, short-term interest rates are a kind of fuel cost. Liquidity is to bankers as crude oil is to refinery owners. You pump it into your refinery, process it, and out comes something your customers will buy.

Banks are lenders, but they are also borrowers. They borrow cash from depositors and bondholders. Then they loan it to borrowers at a marked-up interest rate. Cost of funds is critical to bankers.

It is not critical to most other businesses. The decision to open a new factory doesn’t usually hinge on getting a lower interest rate. It depends on whether or not customers will buy the goods that the new business produces.

But because the Fed is banker-driven, it thinks cost of capital is everything. Therefore, a lower interest rate will stimulate activity. They’re right—up to a point—but that relationship is not linear. It flattens out as you get closer to zero.

Yellen is aware of this. Her point with Footnote 8 was that interest rates aren’t always an effective stimulant. But also, she isn’t the only vote. She has to convince the other governors and regional Fed bank presidents. And they are all influenced to varying degrees by the banking industry, which loves lower rates.

Footnote 8 is a warning

Negative rates are death to commercial banks. A -9% NIRP would kill many banks.

So maybe that footnote was a warning, the Yellen equivalent of a brushback pitch to overly eager bankers. “Look what can happen if we don’t do it my way.”

I don’t think Yellen will take us down to -9% or anywhere close to it. I do think she is prepared to go below zero if she sees no better alternatives according to her personal economic religious beliefs.

I’m also confident that she and her colleagues won’t take rates much higher from here. I think we will see 0% again (and below) before we see +2%.

Sooner or later, a recession is coming. This feeble recovery is already long in the tooth. There is the real chance we will enter at least a mild recession no later than the end of 2017, brought about by a crisis and recession in Europe.

How will the Fed respond when that recession hits?

The Fed is making those plans right now. If you think 2008–2009 was a wild ride, fasten your seatbelt and prepare to take an airbag in the face. The next ride will be wilder.

*  *  *

Each week in Outside the Box, John Mauldin highlights a thoughtful, provocative essay from a fellow analyst or economic expert. Some will inspire you. Some will make you uncomfortable. All will challenge you to think outside the box. Subscribe now!

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Money Honey's picture

If the Fed does What it Wants to, the Result will be the Opposite of What it Wants

The US economy is slowing perceptively. What should the Fed be doing? They might want to cut interest rates. Problem. Another tool in the arsenal – cheapen the US dollar. Again there is a problem. Whether that works & what is a good idea are separate issues. Certainly a rate hike would take the stock market down 20%. It’s going to be just the opposite of what the Fed wants.


SomethingSomethingDarkSide's picture

3 words: Massive Leveraged Buyout

Haus-Targaryen's picture

I don't think upcoming negative rates will surprise anyone.  I think at this point, this is par for the course.  

I think we're going to have a big deflationary implosion, then the CBs step in with the few tools they have left, primarily NIRP + QE on a scale never before imagined + helicopter money and then as the population loses confidence in the currency, more and more of it starts to come out of the woodwork accelerating the velocity of money and ends in a hyper-inflationary collapse.  

There are other options available, but I don't see them as really doable as everyone has to play along and convincing countries that are systemically relevant but are already broke beyond belief (looking at all of Latin Rainbowland + Greece) to "take one of the chin for the team" simply won'T happen. 

We have two systems which are dependent on one another collapsing parallel to one another; the monetary system and the banking system.  

I don't know when, but when "it" does come, it will be awe-inspiring, very dark, and very, very very scary. 

seek's picture

Spot on. The collapse will make as much history as the Roman empire did -- but do so in just a few years.

Arnold's picture

Started in Flint, with lead pipes.

adanata's picture


The whole perspective is upside down. The very notion the Fed is attempting to do anything but destroy us is nonsense. Moreover, the idea Yellen is making 'decisions' based on her 'economic religion' is equally laughable. She does whatever she's told to do by the Barons de Rothschild. The ONLY consideration for any of them is whether or not they can get this deliberate destruction past the Sheeple with some 'credible denial'. I dare them to start cleaning out depositor accounts in the U.S. You may 'expect' negative rates; a euphamism for outright theft, but I don't think it will fly.

BuddyEffed's picture

This is a set up for "Don't blame us for the big NIRP that took your money. Interest rates were on autopilot "
To fix this crisis, just start racing the fuck out of the rich. That has a better chance than bail ins and NIRP

In.Sip.ient's picture

Bingo, we have a winner!


BuddyEffed's picture

They would blame that on the math that Rogoff like economists would have blessed as being desperately needed.

Earlier typo. "Taxing" the fuck was meant.

Plus the minus 9 is a scare tactic to see if we will accept minus 2 and rationalize it could have been worse, so STFU and suck it up.

RaceToTheBottom's picture

It was all so "unprecedented".


Haus-Targaryen's picture

"going to have" 

Additionally, rent has flatlines and even decreased in many parts of the United States.  Are you working as payroll staff making $32k a year in the NYC area?  Awesome.  You can move to Scranton, do the same job, make ballpark the same money and have a lot more cash in your pocket.  

But no, too many stupid fuckers want to live "like where omg I can like walk to the bars and the clubs" and thus they pay for it. 

Unless you work in International finance, silicon vally, or Hollywood there is no need to live in these over-priced highly dense uban and sub-urban centers.  Move to a smaller town -- you'll be happier.  

(Coming from a guy who lived 5 years in a town with less than 90k in it to save money while in school.) 

Mercuryquicksilver's picture

Yep, coupled with current overproduction and excess inventory through the deflationary cycle and immediate over correction to shortages and inflation this will certainly be the dark ages.


I wish I owned a farm, and the weapons needed to keep it.

The_Dude's picture

Somewhat agreed but I think the deflationary collapse is 20 years of stagflation (ala Japan ) until it gets so bad the American version of Abe shows up to put a bullet in it.

Of course, war could break out at any point along that path and all bets are off.

NobodyNowhere's picture

Very helpful macro view in a nutsell.  Lately, I have been wondering how President Trump's policies, if carried out, would affect financial markets.  My base line layman's view (for my trading purposes) is that multinational corps could dive; USD/MXN go orbital; and CNH and JPY wobble insanely; China face massive and prolonged unrest; and so forth.  But I suspect all the two-handed economists, CEOs, will show President Trump some horror movies and even some men behind the curtains will pay a visit (in the 70s I read that it happened to a newly inaugurated Nixon).

SafelyGraze's picture

-9 looks good compared to -40

the year 1929

Mercuryquicksilver's picture

Why this isn't a common discussion point is beyond me. USD is the product of US sovereign. It is ripe for buyout, but by who? Another sovereign, world bank? IDK


It will come down to taking a hard, but swift, hit by defaulting, or  a slow agonizing transition of debt to new owner.  A new owner who may call in debt and collateral.


What happens when all US private and public debt is sold for 20c on dollar to something other than FED? And the new entity halts discount rate/inflation?

VWAndy's picture

 As if we did not go below the actual inflation rate years ago.

BorisTheBlade's picture

You seem like a knowlegdeable guy, help me out, if we have negative nominal interest rates (and real negative ones for years), shouldn't both nominal and real inflation and unemployment rates turn negative at some point? They say it's NEW NORMAL, so I guess anything goes and at some point all those beautiful metrics will show as complex numbers. Else we would arrive to the conclusion the Fed has failed its stated mandate and should've been abolished years ago: unthinkable.

VWAndy's picture

 Yes but the books are cooked so it can be hidden.

 Bisically we are being played every way they can think of. The thing that boggles me is how long its been this way.

Mercuryquicksilver's picture

Follow wiemark, there are some correlations. But we are on a grand scale. If they had the ability to move from the printing press to digital, they could have extended much longer. They literally ran out of printers at the end. Not a big deal with digital keystroke.

VWAndy's picture

 Trade just is. Its the MOE thats busted because tptb busted it. We should think about taking this shitshow over to Bartertown. Let them all eat thier own cooking. Id pay good beer to watch the krugster eat his cat.

Hohum's picture

Make the Federal Reserve an algorithm.

Jack Mehoff IV's picture

using negative rates by the Fed isnt monetary policy as much as political policy...They want the end of cash, then they can tax the fuck out of us on our own money. par for the course

Jack Mehoff IV's picture

using negative rates by the Fed isnt monetary policy as much as political policy...They want the end of cash, then they can tax the fuck out of us on our own money. par for the course

Bill of Rights's picture

There won't be a rate hike in December either or any time soon. The US growth is slowing down and won't be able to digest higher interest rates. But of course there is a room to go negative like other CBs did...


"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way."

Joebloinvestor's picture

"Negative rates are death to commercial banks. A -9% NIRP would kill many banks."

Hopefully everyone of them and the ones in charge.

max2205's picture

fuck that stupid bitch

gregga777's picture

Assuming that any of these hereditary inbred subnormal IQ elite morons survive the revolution they should all be housed in zoos around the world. Then every Nation's Citizens can visit the zoo to show their deep and abiding contempt for all of the (formerly) privileged, pampered and protected elite morons who brought so much suffering down on them.

But, hopefully Christine Lagarde, Janet Yellen, Benjamin Shalom Bernanke, Allan Greenspan, Ken Rogoff, Mario Draghi, Stanley Fischer, Neel Kashkari, Eric Rosengren and the others all end up swinging from lampposts.

Nolde Huruska's picture

There is only one mathematical formula that I concern myself with these days: the magnitude of the velocity of a projectile at distance x. It solves many problems that are otherwise intractable.

headfake's picture

Didnt Fischer say after the meeting that negative rates are working a charm elsewhere? This is want they want all along and will be in the US soon watch and see. Next will be central bank equity purchases just like Japan. Then soon they'll own everything.

Cluster_Frak's picture

Do we even need Federal Reserve? We only need an algorithm to provide liquidity if the market drops a certain %. Circuits brakers could handle this.

tricorn teacup's picture

If we turned it over to a formula, the formula is still dependent on accurate economic data and a correct target.  Fat chance getting correct inflation and unemployment rates with the current regime.  And the correct target rate is 0 inflation, not the decidedly positive rate the Federal Reserve favors.

On the other hand, if we had a proper precious metal definition for our currency there would be no need for a monopoly on the supply.

gregga777's picture

After Mr. Trump wins the Presidential election in November Goldman Sachs will order their Feral Reserve to hike interest rates with a vengeance crashing the world economy. The Feral government and the Feral government's organs of state propaganda (mainstream media & entertainment oligopoly) will try to blame Mr. Trump.

But, their efforts will fail and afterwards the People's Courts will mete out the appropriate sentences, gallows or guillotines, to all of the treasonous scum who destroyed the American economy amongst numerous high crimes and misdemeanors.

buzzsaw99's picture

1) yellen buys pressure cooker

2) fills cooker with nirplosives

3) attaches wires

4) blows up in face

orez65's picture

I don't blame the Federal Reserve or the Federal Government anymore, or at least today as I am so pissed off.

I blame the American People for being so fu.king stupid !!!

They don't fu.king take the time to understand what the Federal Reserve does: "fu.king counterfeit".

Or what the banks do through "Fractional Reserve Banking": "fu.king counterfeit"

And they fu.king call these thieves "experts on the economy".

They are fu.king, fu.king, fu.king, uber fu.king, fu.king ... THIEVES !!!

AMERICAN PEOPLE: WAKE THE FU.K UP !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

29.5 hours's picture



The people will wake up. At least they have the capacity. What is vitally needed to make that happen is good leadership. See much of that around?



VWAndy's picture

 If there was a good leader would anyone follow?

  Or would that leader have some accident before they were any kind of a threat to the systems in place now?

 The stall and bartering. Then maybe some real justice and some first class hangins.

SmedleyButlersGhost's picture

I'm with you.  I don't know where fu is or who this fu king is - but fuck him - or is it butt fuck him?  

Consuelo's picture



How about the $4-Trillion 'footnote' regarding Fed options during recession...?


While they may well try negative money first, when unemployment begins to ramp, money printing is what will commence - writ Large.

cowdiddly's picture

Auto pilot: bitchez.

In the event of a loss of cabin pressure, note that the oxygen mask is stored it the overhead compartment area. Please follow your flight attendants instructions.

sevensixtwo's picture

I think the correct dynamical variable for the Fed to target is not so much negative rates, but balance sheet reduction.

conraddobler's picture

Ultimate FED footnote:

It's good to be king, suck it! peasants.

29.5 hours's picture


Negative rates = retirement evaporates away.



VWAndy's picture

 I wonder how many times they think they should swipe all the pension funds.

GunnerySgtHartman's picture

No rate hike this year ... bank on it.

undercover brother's picture

For thousands of years in banking there have never been negative interest rates.  Now CB's and politicians stepped in and they have screwed up the financial markets so badly they can't go back to normal without a causing a massive reckoning in equity, real estate and debt markets.   For bankers and especially politicians, this is not acceptable as millions of registered voters 401k plans hang in the balance as do campaign contributions and fees.  So, what do they do?  They do what politicians always do: double down on stupidity.