The Fed has priorities other than the ECB, Bank of Japan, Swiss National Bank, et al.
During the press conference today following the FOMC meeting, Fed leader Jerome Powell was asked about and when the Fed would push the key policy rate to the negative. Powell did not respond with his usual, "we will behave as appropriate." He had a real answer.
For months, there has been violence from Wall Street and speculators, and from the White House, that the Fed should or would cut key interest rates to the negative. The peak of negative interest rates was probably in late August or early September.
Since then, long-term returns have risen across the board, and a significant portion of $ 17 trillion in negative return debt has become somewhat positive-return debt. So maybe people are worried about the negative interest rate coming to an end and they want the Fed to step in and save the day.
At the press conference following the meeting of the FOMC, negative interest rate policy (NIRP) came up in the context of the Fed blowing the firepower with these interest rates before it is even in a recession; and then not have much firepower left when the recession comes. Powell was asked directly about it: Is there "any scenario where you can imagine speeds crashing into negative territory, and are there any other tools you can use before you have to go there?"
And Powell replied: [1
" These were the two unconventional monetary policy tools that we used a lot, we feel they worked pretty well.
"We didn't use negative prices. And if we were to find ourselves again at a future time at the effective bottom line – not something we expect – then I think we would consider using large acquisitions of assets and guidance going forward.
"I don't think we would look at using negative interest rates."
So negative interest rates don't happen. Over the years, other Fed Deputies expressed that they are not willing to use negative interest rates – and for good reason.
Negative interest rates are even worse than interest rates near zero. They have not proven to be beneficial to the economy anywhere they are currently operating and are causing serious devastating side effects for the people and the banking system in the country.
However, negative interest rates such as the follow-up and addition to the massive QE have been effective in keeping the eurozone glued together because they allowed countries to stay afloat but do not need to spend their own money to stay afloat. They did so by making funding plentiful and almost free, or free or more than free.
This includes Italian government debt, which has a negative return over three years. The Italian 10-year return is only 0.9%, rather than 7% or 8%, as it was during the debt crisis as Italy approached a standard, as Greece had already done. The ECB's latest interest rate cut, unassuming and controversial as it was, was designed to help Italy move forward so that it did not have to leave the euro and break out of the euro zone.
The United States does not need negative interest rates to stay glued together. It can print their own money.
In Switzerland, Denmark and some other countries, negative returns are used as overt currency manipulation to push down their currencies. It will be tempting for the US as well, but then there is a price to pay – as we can see from the economic doldrums and the banking failure in Europe and Japan.
Negative returns have been a new blow for European and Japanese banks bubbling from crisis to crisis, and their shares fluctuate over decades. Negative returns are the latest blow to pension and pension systems. Negative returns distort the pricing of risk, and therefore distort capital costs and lead to business decisions that would otherwise be idiotic waste and poor investment. This is a question that is already playing at low interest rates – for example, repurchase of shares financed with borrowed money – and it is getting much worse with negative interest rates.
The Fed is the bank's guardian and has been created for the banks. The 12 regional central banks are owned by the financial institutions in their respective districts. And a monetary policy that harms banks, undermines the banking system and puts bank shareholders at risk of huge losses is just the basic anathema to the Fed. Powell wasn't the first to just say no to NIPP, but he clearly said.
The 10-year Treasury interest is ripped. Unstoppable negative yields are stopped. Read … WOLF STREET REPORT: Snapback Bloodletting in the Overripe Bond Market
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