> New York Fed President William Dudley said last month that policy makers were "not thinking at all seriously of moving to negative interest rates.
> "But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.
The Fed continues to fritter away whatever credibility it has left by waffling back and forth on interest rates.
It raised interest rates and committed to 2.0% core inflation by 2018 just two months ago. By including this long-term negative interest rate scenario in its 2016 stress tests, it is basically admitting that there is some non-negligible probability that it will be unable to follow through on this commitment, and that banks should be prepared to weather the storm if and when it completely loses control of its grip over the direction of the short term interest rate.
The article does not actually speculate on what might happen if the Fed were to reverse its rate hike and instead lower the FFR into negative territory. I'd imagine that basically nothing would change, and that the banks would simply take a 0.25% haircut on their holdings of 3-month treasury bonds as they have been doing in Europe for the past 1.5 years. They will not pass this negative interest rate onto regular customers as this would either (a) drive them to another bank which would benefit from the new deposits or (b) force consumers to withdraw deposits and hold cash instead. Banks need these deposits to loan against, and a 0.25% "holding tax" on a relatively small portion of their holdings would not justify the loss in deposits. Banks will just eat the hit to their profit margins and life will go on as normal in the supply side of money world.
> "But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.
The Fed continues to fritter away whatever credibility it has left by waffling back and forth on interest rates.
It raised interest rates and committed to 2.0% core inflation by 2018 just two months ago. By including this long-term negative interest rate scenario in its 2016 stress tests, it is basically admitting that there is some non-negligible probability that it will be unable to follow through on this commitment, and that banks should be prepared to weather the storm if and when it completely loses control of its grip over the direction of the short term interest rate.
The article does not actually speculate on what might happen if the Fed were to reverse its rate hike and instead lower the FFR into negative territory. I'd imagine that basically nothing would change, and that the banks would simply take a 0.25% haircut on their holdings of 3-month treasury bonds as they have been doing in Europe for the past 1.5 years. They will not pass this negative interest rate onto regular customers as this would either (a) drive them to another bank which would benefit from the new deposits or (b) force consumers to withdraw deposits and hold cash instead. Banks need these deposits to loan against, and a 0.25% "holding tax" on a relatively small portion of their holdings would not justify the loss in deposits. Banks will just eat the hit to their profit margins and life will go on as normal in the supply side of money world.