Sunday, July 31, 2016

Is The Fed Is Preparing For Negative Rates? 
There Is A Sign Everyone Missed
"I think it’s possible that the Fed will push rates below zero when the next recession arrives. I explained why a few months ago in my free weekly column, Thoughts from the Frontline, at Mauldin Economics. In that regard, something important happened recently. And not many people noticed. I’ll do a quick review to explain. In Congressional testimony last February, a member of Congress asked Janet Yellen if the Fed had legal authority to use negative interest rates. Her answer was this:
'In the spirit of prudent planning we always try to look at what options we would have available to us, either if we needed to tighten policy more rapidly than we expect or the opposite. So we would take a look at negative rates. The legal issues I'm not prepared to tell you have been thoroughly examined at this point. I am not aware of anything that would prevent the Fed from taking interest rates into negative territory. But I am saying we have not fully investigated the legal issues.'
So as of then, Yellen had no firm answer either way. A few weeks later, she sent a letter to Rep. Brad Sherman (D-CA). He had asked what the Fed intended to do in the next recession and whether it had authority to implement negative rates. She did not directly answer the legality question, but Sherman took the response to mean that the Fed thought it had the authority. Yellen noted in the letter that negative rates elsewhere seemed to be having an effect. Yellen’s claims are a clear sign the Fed is prepared to dive .. Fast-forward a few more weeks to Yellen’s June 21 congressional appearance. She stated that the Fed DOES have legal authority to use negative rates but denied any intent to do so. 'We don't think we are going to have to provide accommodation, and if we do, negative rates is not something on our list.' .. I’m concerned about the legal authority question .. Bottom line: by putting the legal authority question to rest, the Fed is laying the groundwork for taking rates below zero. I’m sure Yellen was telling the truth when she said in June that the Fed had no such plan. But, plans change. The Fed says it's data dependent. If the data shows we’re in recession, I think it is very possible the Fed will turn to negative rates to boost the economy. Except, in my opinion, it won’t work." 
- John Mauldin
link here to the reference

1 comment:

Anonymous said...

I doubt if the USA or the UK would be so foolish to go negative. Both countries have substancial life insurance industries which, with their long term contracts, after a while would hit the rocks. Those contracts assumed at the time they were undertaken some sort of positive interest rate for reinvestment. Negative interest rates were beyond the imagination of those writing the contracts in yesteryear. Further just about every defined pension plan will similarly fall apart once the more immediate capital gains associated with lower interest rates of current portfolios cease to support increasing liability valuations.

It is time to let interest rates rise even it it means the long overdue depression, or else there will be no economic system left in my opinion. Europe is already a failed enterprise ... in my opinion ... All the Kings Horses and All the Kings men will not put it together again and neither will bleeding heart Merkel. UK should get out quick !