Yellen Confirms Fed Has "Legal Basis" To Pursue Negative Rates

Back in February, just after Japan launched its own NIRP, a conundrum was unveiled when it was revealed that the Fed may not have the legal basis to pursue negative interest rates. Specifically, in a recently declassified Fed staff memo from August 2010 titled "Reducing the IOER Rate: An Analysis of Options", the Fed explicitly said that it may not have the legal authority to set negative interest rates in the U.S. To wit:

"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."

This was followed by a question during Janet Yellen's February trip to Congress when Rep. Hensarling asked the following question:

"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."

All of this was resolved moments ago, when in a follow up question whether the Fed has concluded if it has the legal authority to puruse negative interest rates, Yellen replied:

  • YELLEN: WE DO HAVE LEGAL BASIS TO PURSUE NEGATIVE RATES

It is unclear based on what Yellen has made this determination, although as we said in February:

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.

However, before said legality was deemed sufficient and necessary to launch NIRP, she clarified that the central bank has found “significant shortcomings” to prospect of negative rates and such policy is “not something that’s on our list” if additional accommodation is needed. “I want to emphasize it is not something we are considering” or “actively looking at,” Yellen said.

We leave it up to readers to interpret this statement as they wish, however it is worth also noting that in the same response she also said that the Fed can’t give a "precise timetable" for balance sheet normalization.

Considering last week's shocking Bullard "trial balloon" U-turn which confirmed at least one Fed president is now in the "one and done" camp, we are confident that far from normalizng its balance sheet, the Fed's next step will be a denormalization one.