The head of the Federal Reserve said Wednesday the U.S. central bank is not considering using negative interest rates, despite President Donald Trump seemingly pushing for them.
In a tweet Tuesday night, the president said other countries are enjoying the advantages of negative interest rates, and he urged his own central bank to accept the “gift” they would bestow on the U.S. economy.
Typically central banks tinker with lending rates in an attempt to control inflation, raising rates when they want to cool down an overheated economy, and cutting them when they want to encourage borrowing and investment. But in recent years, central banks in Europe and Asia have gone as far as making their interest rates go below zero in an attempt to counter unprecedented economic situations.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’,” Trump tweeted.
As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!
The president has long criticized his central bank chief for keeping interest rates higher than Trump would like them to be. That’s largely because cheap lending rates tend to be good news for the stock market, which Trump is understood to view as a proxy for his own popularity and economic aptitude.
Currently, the U.S. Fed’s benchmark interest rate is set at 0.25 per cent.
Speaking at a think-tank in Washington, D.C., on Wednesday morning, Powell addressed the economic impact of the coronavirus. He was asked by reporters afterward whether or not the bank was considering negative interest rates.
“I know there are fans of the policy, but for now it’s not something that we’re considering,” Powell said. “The committee’s view on negative rates really has not changed …. This is not something that we’re looking at.”
Powell’s reluctance to go negative may be wise. While other countries have tried it, Karl Schamotta, chief market strategist of Cambridge Global Payments, says there is some academic research to suggest that negative rates could harm the U.S. economy by raising precautionary savings rates and reducing incentives to lend.
“As the euro area, Japan, Sweden and Switzerland have shown, there’s no conclusive evidence to suggest that negative rates lift lending, growth or inflation,” Schamotta said.
More stimulus possible
While pouring cold water on the idea of negative rates, Powell didn’t suggest the Fed planned to stay on the sidelines while the U.S. economy goes through what he described as an experience “significantly worse” than any recession seen since the Second World War.
Powell cautioned that widespread bankruptcies among small businesses and extended unemployment for many people remain a serious risk.
“We ought to do what we can to avoid these outcomes,” Powell said.
Bank of Montreal economist Michael Gregory said there’s a lot that the Fed can still do besides negative savings rates.
“The Fed has more policy cards up its sleeve, and is more than willing to play them to promote economic recovery,” he said. “And it won’t be taking these cards off the table for a while.”