That’s an extreme step that could signal desperation rather than confidence during a fragile period for the American economy. The Fed didn’t venture below zero even during the 2008 crisis.
“You don’t want to do something that is trying to help the patient but actually scares the patient and makes a recovery more difficult,” Randall Kroszner, who served as a Federal Reserve governor during the last crisis, told CNN Business.
Gas prices are already creeping higher
“Cheerleading higher prices is tone-deaf,” said Greg Valliere, chief US policy strategist at AGF Perspectives.
After crashing to negative $37 a barrel last month, crude has rallied back to $27 a barrel. While that is still extremely cheap, gasoline prices have already begun to creep higher.
“Consumers are tapped out right now. They welcome lower prices,” said Valliere.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the GIFT,'” Trump tweeted this week.
“The jury is still out,” said Kroszner, a Fed governor from 2006 to 2009 who is now a professor at the University of Chicago Booth School of Business.
Pushing for negative interest rates threatens to undercut Trump’s efforts to instill confidence in the economy.
“It’s bad karma. It sends off a bad vibe that we’re in deep trouble and have no expectation of stronger economic growth,” he said.
Kroszner noted that even in 2008, when the financial system was teetering on the brink of collapse, the Fed didn’t dare venture into negative territory: “We decided to go to zero, but we were very concerned about going negative because of unintended consequences. It’s not really in the DNA of the Fed to go negative.”
Savers and banks aren’t fans of negative rates
America’s powerful banking industry would oppose negative interest rates because such a policy would hammer already razor-thin profit margins.
“I don’t favor it. It’s hard for banks to make money and generate capital,” Bruce Van Saun, CEO of Citizens Bank, told CNN Business.
Negative rates would also be unpopular among senior citizens, a core constituency whose support Trump needs to win reelection. That’s because subzero rates would punish savers and retirees living off fixed income. Instead of earning small amounts of interest on money in the bank, savers would get penalized.
“Even back at zero, it’s very painful for savers and retirees. They’re not really making anything on their money,” Van Saun said.
“I know there are fans of the policy, but for now it’s not something that we’re considering,” Fed Chairman Jerome Powell said Wednesday.
Loretta Mester, president of the Cleveland Fed, said she would prefer other tools including quantitative easing — the Fed’s massive bond-buying program — and forward guidance, which is a promise to keep rates low for an extended period of time.
‘They can’t print jobs’
Another risk is that the Fed could find it hard to escape negative interest rates.
It took seven years for the Fed to get off zero after the Great Recession. And the central bank was never able to significantly shrink its balance sheet without rattling financial markets (and the president).
“I really hope they realize that the deeper they get, the more difficult it will be for them to get out,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients on Wednesday.
Yet there are limits to the Fed’s vast powers in a pandemic.
“They can’t print jobs,” Boockvar said. “They can’t create anti-virals and a vaccine and get people confident to shop without risk until then.”