Text size
Photography by Nicholas Kamm / AFP / Getty Images
President Donald Trump now wants the Federal Reserve to lower interest rates to zero or below. But he should consider the negatives of negative rates, which have failed to motivate strong growth in Europe and Japan and are likely to cause a firestorm among US savers.
Stock market investors, meanwhile, should note that this month's upswing has come while bond yields have reversed some of the recent sharp falls.
In its latest broad against the central bank, Trump tweeted on Wednesday : "The Federal Reserve should get our interest rates down to ZERO, or less, and we should start refinancing our debt. At the same time, they extend their maturity considerably. "The president ends by calling the Fed" boneheads "for not following other central banks at negative interest rates.
That's the view of the self-proclaimed King of debt." rates from the perspective of a borrower, "writes Paul Ashworth, chief economist at Capital Economics.
But the Fed has been lukewarm about such an opportunity," in part because officials know it can cause outrage among savers and dragons the central bank into a political maelstrom, "he adds. Money market funds could also see large outflows, which could disrupt short-term funding for businesses, banks and perhaps even more
In addition, the registration of negative rates in the eurozone, Sweden, Denmark, Switzerland, and Japan has been mixed, Ashworth continues. While bond yields have fallen below zero, banks were reluctant to impose negative interest rates on depositors, resulting in a squeeze on profits.
Trump believes the United States deserves to have interest rates at just below since it has "a great currency, power and balance." In fact, negative interest rates reflect the economic activity of Europe and Japan. By contrast, US interest rates were at a peak in real terms (that is, after adjusting for inflation) when it was "Morning in America" in the mid-1980s.
Long-term government bonds briefly touched 14% in May 1984 – as much as 10 percentage points above inflation. Now, real returns on inflation-protected securities are just above zero. The 10-year TIPS gives 0.14% while the 30-year TIPS gives 0.56%. After taxes, which are imposed annually on the inflation adjustment, these returns are already below zero.
Unlike last year, Trump's bashing now seems unfounded. In October last year, when the central bank was about to raise the key policy rate and shrink its balance sheet, and the stock market was moving into the correctional area, I wrote that the president had a point in criticizing the central bank for being too tight.
The Fed is now ready to cut the federal funds target rate from today's 2% -2.25% at next week's Federal Open Market Committee meeting. The futures market for fed funds provides 88.8% probability of a 25 basis point cut – a quarter of a percentage point – and a 72.3% probability of a further 25 basis point reduction or more at the December meeting. The Fed has also ended its decline in the balance sheet.
Meanwhile, the stock market has contracted
S&P 500
and took the 3000 level on Wednesday for the first time since July 30. That made the reference only 0.82% shy of the record and up 2.54% since the beginning of the month. The
Dow Jones industrial average
was only 0.81% away from the all-time high,
The September rally has also been marked by an even more remarkable rotation from the market's past winners, especially dividend-paying, slow-growing defensive stocks, to lost values.
While bond yields have been declining in recent days, with the Treasury's 10-year high, 1.749% noted late Wednesday, up from 1.461% on September 3, but that coincided with the stock market's September meeting, which has been led by industry and finance. A more sloping yield curve is also a positive economic sign.
Be careful about what you want when asking for zero or negative interest rates, Mr. President.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
