Over the weekend, we presented a comprehensive step by step analysis laying out both the mechanics (and implications) of the Fed unleashing NIRP in the US when the time comes: a time which as JPM further defined, would be characterized by "recession-like conditions." In other words, right about now if Yellen so chose.
Curiously, in a nostalgic deja vu to the ECB's own monetization of debt, which was illegal according to Article 123 (and Draghi himself back in the day), until Europe's "constitutional judges" decided that it was actually all quite legal before Draghi proceeded to announce it in late 2014, Bloomberg points us to one of the recently declassified Fed staff memos from August 2010 titled "Reducing the IOER Rate: An Analysis of Options", which states that the Fed "may not have the legal authority to set negative interest rates in the U.S."
"There are several potentially substantial legal and practical constraints to implementing a negative IOER rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero. Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority n this area."
No legal authority? No problem. Just call in Mario Draghi's lawyer, or any other legal representative of Goldman Sachs and/or its former employees, and whatever amendments need to be made to the Federal Reserve Act, will be made.
More curious is that as the Fed's paper admits, "the Federal Reserve computer systems used to calculate and manage interest on reserves do not currently allow for the possibility of a negative IOER rate, although these systems could be modified over time if needed."
Surely this won't be a problem either: after all if the world got through Y2K, this will be a walk in the park.
Most notably, however, the Fed talks about about the likelihood of a shortage of physical cash in case of "sufficiently negative IOER rates":
... at sufficiently negative IOER rates, DIs might opt to shift a significant quantity of their reserve balances into currency. Present Federal Reserve inventories of currency, at about $200 billion, would not be adequate to cover large-scale conversion of the nearly $1 trillion in reserve balances to banknotes.
Reserves were $1 trillion 2010: they are now over $2.5 trillion, implying the cash shortage would be about 2.5x time worse now than five years ago.
Incidentally, the threat of a cash shortage, and the warning that "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", is one we noted first over a year ago when we first brought attention to the NY Fed's note "If Interest Rates Go Negative . . . Or, Be Careful What You Wish For."
To be sure, this last condition is also the most constraining of all three, but even that has a solution: progressively ban cash or simply make cash transactions if not illegal then borderline impossible, something we have seen numerous overtures toward in the past several weeks, and simply replace with a "blockchain" equivalent, but one which unlike bitcoin is entirely controlled by the money center banks.
In conclusion, we can see why the Fed is optimistic:
While the operational and legal impediments to a negative IOER rate are likely to be significant, for the remainder of this discussion we will assume that they can be overcome.
Well of course they can: after all the people who control the Fed are the same ones who control the legislative, judicial and executive branches of government: as such there is nothing that they can't do unless, of course, the people of the country decide to prevent them from doing it. That however, would entail dragging themselves away from Keeping up with the Kardashians for more than 10 minutes, something that has been scientifically proven to be impossible for a vast majority of the U.S. population.