When Will the Federal Reserve Go into Negative Interest Rates?
Two possibilities always come to mind when discussing the possibility of negative interest rates: either when hell freezes over, or when all hope is lost. In the context of economic stimulation, negative interest rates could be seen as a last-ditch effort to invigorate an economy. However, the reality is that we are already treading on dangerous waters, as negative real interest rates occur frequently when inflation exceeds nominal interest rates.
According to Martin Harris, real rates are already negative whenever the inflation percentage exceeds the nominal interest rate percentage, which is a common occurrence. This phenomenon represents the true cost of holding currency, akin to the cost of holding real estate which includes property taxes.
The Current Outlook and Federal Reserve Futures
As of now, according to the Fed funds futures market, rates are not expected to dip into negative territory. These futures indicate that the Fed funds rate is more likely to peak at around 99.00, implying a rate of 1 at least. This suggests that the Federal Reserve is not anticipating a significant economic downturn necessitating negative interest rates.
It is important to consider the structural and economic reasons why the Federal Reserve would not implement negative interest rates. Firstly, it would be structurally destabilizing. Instead, the Federal Reserve can revert to its traditional method of injecting money into the economy by buying securities. This practice was utilized in response to the 2008 financial crisis and remains a viable strategy in times of economic distress.
Janet Yellen's Stance on Interest Rates
Janet Yellen, known for her cautious and conservative approach to monetary policy, is determined to raise interest rates at the first opportunity. While her decision to raise rates can be seen as a step towards recovery, it also reflects a broader sentiment that negative interest rates are not a viable option under current economic conditions.
Despite her skepticism towards negative interest rates, Yellen's strategy of implementing traditional monetary policies is aimed at promoting a stronger economy. Her approach focuses on removing support from companies with marginal returns, ensuring that only those capable of producing real economic growth and creating value survive. This is in contrast to the current economic climate, where cronies often benefit from their affiliation with politicians rather than their economic performance.
Conclusion and Future Outlook
The Federal Reserve is more likely to continue its current policies of gradually raising interest rates and utilizing quantitative easing when needed. While there is no guarantee that negative interest rates will be implemented, the markets are currently pricing in the expectation of rate hikes over the next twelve months. By maintaining a balance between stimulating the economy and preventing excessive inflation, the Federal Reserve can ensure a sustainable economic growth for the future.