DawgTalkers.net Forums DawgTalk Everything Else... The Fed may be preparing for the unthinkable — negative interest rates in America

Isnt the federal reserve a privatized bank?


https://www.yahoo.com/finance/news/feds-janet-yellen-mulls-negative-interest-rates-183711629.html

Janet Yellen arrives at the 2016 annual meeting of central bankers in Jackson Hole, Wyoming. AP Photo/Brennan Linsley
Negative interest rates are spreading like a virus. Central banks in the Eurozone, Switzerland, Sweden, and Japan all have below-zero policy rates. “NIRP,” as economists call a negative interest rate policy, is a desperation move—but the only move those central banks have.

The Federal Reserve hasn’t followed—yet. When the next recession strikes, I believe Janet Yellen will choose to break the zero lower bound. The rationale was laid out in Jackson Hole. Look behind the headlines and you’ll see the Fed already preparing for NIRP.

In theory, negative rates should encourage consumers and businesses to spend more freely and stimulate growth. It hasn’t worked out that way. NIRP just punishes savers and makes everyone miserable.

The Fed Moves Slowly

Major Fed policy changes unfold very slowly. Remember “The Taper” plan to end quantitative easing? Ben Bernanke first floated the idea in May 2013. It took until October 2014—a full 18 months—to finally end the bond-purchasing program. And then it was another 14 months before the Fed hiked rates with a baby step in December 2015.

The Fed shouldn’t let markets dictate its decisions, but we all know it does. They start hinting months, even years ahead of time in hopes markets will adjust slowly. Sometimes it works.

With NIRP, there’s another complication: The Fed hasn’t done this before. It needs to get ready.

Learning the NIRP Ropes in Jackson Hole

What better way to learn the NIRP ropes than from fellow central bankers who have actually done it? The Fed’s recent Jackson Hole retreat was an opportunity. And sure enough, they had a session on Negative Nominal Interest Rates.

The lead presenter, Marvin Goodfriend of Carnegie Mellon University, is an unabashed NIRP proponent. His paper “makes the case for unencumbering interest rate policy so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.”

Janet Yellen didn’t bring in Goodfriend for entertainment. She wanted to learn how to implement NIRP. Yellen’s own Jackson Hole speech had a footnote describing a monetary policy rule (to replace the Taylor Rule) that would have sent rates down to -9% in late 2008. It is clearly on her mind.

I believe the Fed wants to have NIRP as a policy option when the next recession begins. Having NIRP in the toolbox does not mean they will actually use it, but it does mean they haven’t ruled it out. The previously unthinkable is now fully thinkable.

Fed Staff Finds Legal Authority

Something else also suggests the Fed is considering NIRP. In congressional testimony last February, Janet Yellen said she had “not fully investigated” the legal issues of a negative rate strategy.

Asked again about NIRP in June, Yellen stated flatly the Fed does have legal authority to use negative rates. She denied plans to do it, but said there was no legal barrier.

So what happened between February and June?

It sure looks like the Fed’s counsel developed some kind of legal justification for NIRP. That doesn’t mean they will do it, of course. It does though strongly suggest Yellen wants to have a NIRP contingency plan ready to pull out if necessary.

Yellen Is Ready for NIRP

I don’t think Yellen will take us down to -9% like the model in her footnote describes. I do think she is mentally prepared to go below zero if she sees no better alternatives that fit within her economic philosophy. I feel very confident she and her colleagues won’t take rates much higher from here. I think we will see 0% again and then lower before we see +2%.

Look, a recession is coming. This recovery, feeble as it has been, is already long in the tooth. I think we have the real potential to enter at least a mild recession no later than the end of 2017 triggered by events in Europe. What will the Fed do then?

They are making those plans right now. If you think 2008–2009 was a wild ride, then fasten your seatbelt. The next crisis will be even wilder.

Subscribe to John Mauldin’s publication, Thoughts from the Frontline.

yikes

Negative rates? They pay you to borrow money? Is that a fixed rate? If so I want to borrow as much as I can and never pay it back so that the money keeps coming.

This sounds like a Republican solution and they give Socialism a bad rap.

.." This sounds like a Republican solution and they give Socialism a bad rap."

Please !!! This is anything but supply side or trickle down Econ.... This called " Kick the can down the road Econ " Just like the Last Two Administrations have done ... Total lack of Leadership ( on either side of the Ilse ) is the name of he Game !

Now I'm confused... we've been told our economy was saved and is just fine at less than 2% annual growth. So why are we now proposing to put in place an "In Case of Emergency Break Glass" measure? And it's based upon a theory that reads good but apparently hasn't actually worked out all that great?

I know the article says they don't think the Fed would actually use it, but it wouldn't hurt for them to have the option. Sounds like the Democrats when they threw their support to give Bush the Authorization for Force in Iraq...

The thing about gov't is if you give them the authority to do it... they damn well certainly will.

quote by OldCold above:

"They pay you to borrow money?"

And conversely, you pay them to deposit your money.

Yeah, right.

"Let's see, I have a thousand dollars in my hand. If I deposit it in a bank, I will have $990."

Of course this is theoretical "Oh my god!!!" internet babble.

I think the article is talking about transactions between banking institutions.

The very fact that this is even being talked about shows that our economy is in a constant downward cycle. It is a series of ebbs and flows, but each subsequent ebb is larger and more disastrous than the once before it, and each flow is smaller.


Whatever it is we're doing - it is NOT working.

No, if you want to keep money in your bank, you have to pay them interest in order to do so.

This is horrifying to me. They are stealing peoples retirement money. I would vote for Trump if he made this illegal.

It is horrifying.

Imagine trying to pay your bills. You would have to put money into your account, paying the interest in order to do so, or else pay someone even more of a premium to pay your bills.

There was a time when people could save money for retirement. People could compound their money over time, with solid interest rates. However, once the Fed decided that they could/should cut interest rates to try and stimulate the economy, (which did initially work, at least to some degree) it became a constant, instead of a tool.

The Fed wanted money pouring into the stock market, so they made saving money counterproductive. They wanted people buying things, so they made borrowing money more financially sensible than saving it. Sure we have 0% car loans for 6-7 years, for example, but the person who wants to save up for a purchase actually loses value on their money over time. The problem with the interest rate manipulation is that, as this thread points out, once you reach zero, you risk stalling the economy by raising rates ...... and there is nowhere left to go but into negative rates.

Ugh. People wonder why many feel that the government has screwed them. It's because they have.

I don't know what the fed will do but i know what the typical American voter will do. They will blame it on the sitting President and the sitting congress at the time... Because that is the nature of the myopic voter.

They want to blame the person in the chair today for their problems today. Never mind that these things build over years, sometimes decades until they reach critical breakpoints (for good and for bad)... and that the policies that influence such things often traverse multiple presidencies...

Kinda like those "temporary" taxes that never go away. Or the "toll road tax only until the road is payed for" thing.....that never goes away, just goes up and up.

That makes that space between my mattress and box springs a very popular spot LOL

Doing nothing seems to be working just fine for the republican led congress.

I agree. Doing nothing is better than doing stupid things just for the sake of appearing to be doing something..... but, that has absolutely nothing at all to do with this topic.

Democrats keep getting their debt ceiling raised so they can keep printing money to solve all of our problems.. they should just shut up and enjoy spending it, because it's free.... and they will probably be dead before it causes the total collapse of our economy any way.