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The Federal Reserve economist says growth would have been better with negative interest rates



Negative interest rates have served as an effective policy tool for countries that have implemented them, at least with a view to facilitating economic conditions, according to a Federal Reserve study.

In a recent research report, San Francisco Fed economist Jens HAN Christensen looks at the results of five foreign central banks that implemented sub zero rates from 2012, when the Danish National Bank first went negative. In both cases, the move immediately brought down government interest rates and helped loosen these economies.

Had the US done the same, Christensen wrote, the growth rate after the financial crisis could have been better. The US central bank lowered the reference rate to a target range of zero to 0.25% at one point, but never crossed the threshold to go negative.

"Evidence that US economic recovery after the crisis was constrained by this political choice … suggests that, from 2009 to 201

1, US policy rates could have supported higher economic growth and ultimately pushed inflation closer to the Federal Reserve's target," he said.

Conclusions go directly to some key beliefs held by Fed officials: that the "effective lower limit" is somewhere near zero, but not below, and that charging depositors to save their money is not an effective strategy to boost growth and raise a healthy inflation level, which the bank estimates to be 2%. The Fed has struggled to reach its target and reflects weak inflation in other global economies, including those that have used negative interest rates. That's about $ 17 trillion worth of negative government bond yields globally.

President Donald Trump has asked the Fed to aggressively cut and tweet in September that it should "bring our interest rates down to NULL, or less." [19659002] Fed chairman Jerome Powell, at his political meeting in September, said that officials considered the benefits of going below zero, but opted against the strategy.

"So negative interest rates are something we looked at during the financial crisis and chose not to," he told media members after the meeting of the Federal Open Market Committee.

Powell said that the strategy of using large assets – quantitative easing – along with future guidance that told the public about their long-term intentions served the Fed's purpose.

"We feel they worked pretty well. We didn't use negative prices," he said. "And I think that if we were to find ourselves again at the future at the effective bottom line – again, not something we expect – then I think we would be looking at using asset purchases on a large scale and guidance going forward. I don't think we will look at using negative prices. I just don't think they'll be at the top of our list. "

However, Christensen argues that the effective sub-limit" is obviously significantly below zero. "[19659012] & # 39; A restriction only in theory & # 39;

In Denmark, for example, the return fell to minus-1.29%. At one point earlier this year, the entire German yield curve was below zero. The European Central Bank was part of the study, as was the Swiss National Bank, the Swedish Riksbank and the Bank of Japan, together with Denmark.

Using these zero interest rates, he said, reflects "the shared belief that zero is either a real or self-imposed restriction that was wrong and was no longer valid."

Through a series of interest rate hikes, the Fed brought a range as high as 2.25% to 2.5%.

However, a faltering economy and the final inversion of the government's yield curve, where short-term bonds outperformed their long-term counterparts, forced the Fed to two interest rate cuts in 2019, with the market expecting a third at next week's FOMC meeting.

Since the Fed began cutting in July, the curve has no longer been inverted, with the key spread between the three-month and benchmark indices on 10-year notes that turned positive on October 11. The recession indicators have also become a little less ominous since then – a reverse curve has been an undeniable sign of a decline over the past 50 years.

"The large level decline in the entire yield curve in all five cases reveals that the zero limit is a limitation only in theory and not in practice," Christensen wrote. "Furthermore, these results show that negative interest rates are effective in lowering the return on all maturities, thereby helping to ease economic conditions in much the same way as lowering the key policy rate away from the lower limit."

Christensen pointed out that his study did not address any broader issues of negative interest rates such as a political strategy or their impact, generally negative, on bank profits and the impact on the economy.


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