Negative Rates Are Coming to America

We’ve repeatedly warned that the Federal Reserve government will impose negative interest rates,  just like other central banks are now doing.

After all, former Fed chair Bernanke said last week that the Fed is likely to impose negative rates during the next downturn. He also said that negative rates should not create a lot of anxiety for investors. (Hmmm…)

The current Fed chair Yellen said the same thing last year.

Bloomberg reports today:

As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week.

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Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.

But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019. [That’s almost 3 years!]

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New York Fed President William Dudley said last month … “I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, [negative interest rates are]  something that we would contemplate as a potential action,” he said on Jan. 15.

Fed Vice Chairman Stanley Fischer said Monday that foreign central banks that had resorted to negative interest rates to stimulate their economies had been more successful than he anticipated.

“It’s working more than I can say I expected in 2012,” he told the Council on Foreign Relations in New York. “Everybody is looking at how this works,” he added.

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