by Chris Marcus, Miles Franklin:
At the same time the Federal Reserve claims it’s going to raise interest rates and normalize its balance sheet, it’s also publishing an essay advocating negative interest rates.
It’s almost so incredible that were it not published on the Fed’s own St. Louis branch website, it might be hard to believe it’s true. But apparently St. Louis Federal Reserve economist Yi Wen disagrees with the projected Fed mantra that it’s time to raise interest rates. Because he actually just wrote an essay explaining what negative interest rates are, and how it could be a perfect next move for the Fed.
In his essay Wen mentions how “conventional monetary theory always assumed that the policy rate cannot go below zero because an individual would not pay, in theory, to lend out his or her own money.”
Which makes enough sense. After all, why would you lend out $100 with the hopes of receiving $97 or $98 in return?
And that’s your best case scenario. You also have the credit risk of the U.S. banks and banking system. Not to mention that you’re going to be receiving dollars that are worth less by the time that you actually get them.
So the idea of negative interest rates is as ridiculous as it sounds. The fact that the European and other central banks have implemented it doesn’t make it any better.
However what’s interesting to note is what Wen himself cites as a reason why anyone would invest in such fashion.
“The central bank can also require (by law) large corporations to keep their cash, savings and loans in the banking system when a negative interest rate policy is implemented. The same argument applies to commercial banks that deposit their cash in the central bank.”
It’s a terrible deal. So how do you get somebody else to take the bad half of the trade? By legislative force. His argument isn’t how it’s a good option for savers, but rather that someone created a law strong-arming certain parties into a bad deal.
Perhaps even more concerning is what Wen writes about the Fed’s intentions and goals.
“Negative interest rates may seem ludicrous since why would an individual buy a government bond with a negative yield, but this is what a central bank would like you to think. The central bank’s goal is to incentivize agents to shift investments away from government bonds to something more productive economically, thus stimulating the economy.”
Isn’t the idea that a central bank is publicly stating that it’s incentivizing investors to alter their decisions a blatant admission of market manipulation? And is this really what the Federal Reserve is supposed to be doing?
Perhaps if the Fed’s unconventional policy of the last decade had somehow magically fixed the problems caused by previous Fed policy, some credence could be given to what Wen is saying.
Yet it’s a decade later, interest rates are still below 2%, the normalization of the balance sheet has yet to occur, and there are new bubbles in the stock, bond, and real estate markets. At what point does the Fed start to think that maybe their strategy hasn’t worked?
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