No Negative Rates for the FED
Some economists were expecting the FED to turn rates negative soon, but they don't seem to do so
Skerdian Meta•Wednesday, May 13, 2020•2 min read
The FED has introduced a massive stimulus package, on top of the fiscal package from the US government. They also cut interest rates to near 0%. But, whatever measures they take, if the shutdown continues the economy will fall apart. Just plain cash doesn’t work when there is no one working.
However, some people were thinking that the FED might turn the rates negative, for further stimulation. Although, after a number of FED speakers today, that doesn’t sound like a possible option now.
Fed’s Bullard Economic Outlook
- Prolonged shutdown risks bankruptcy, depression
- Fed programs had clear announcement effect on markets
- Fed’s dollars swamplands also helped to calm markets
- Goal to stop health crisis morph into financial crisis
- Can continue economic shutdown for too long
- Shutdown his blanket policy, need risk-based approach
- Negative rates are not a good option for the US
- Everyone understands rates on hold for quite a while; not worried about normalizing Fed policy a moment
- Fed’s balance sheet at $10 trillion sounds high (current balance sheet is $6.5 trillion but moving that way)
- Market interest rates expected to stay low with or without use of strategies like yield curve control
Dallas Fed Pres. Robert Kaplan on CNN
- I would be against negative interest rates
- Negative interest rates would impact intermediaries, money market funds
- He is skeptical that negative interest rates would have benefits that would outweigh harm
- More fiscal stimulus will be necessary for growth
- May take to the end of 2021 to work off the excess oil inventories
- Permian basin output will shrink by a million barrels a day, will see bankruptcies, restructuring
- Drug and vaccine development, testing, contact tracing are essential to bringing economy back
Fed’s Harker
- Virus led to a collapse in most forms of consumer spending
- Q2 will be brutally painful because of coronavirus and mandates economic shut down
- We can expect the US economy to underperform until the virus is under control
- Fed’s goal is to make sure every sector of the economy has access to liquidity
- Crisis is severely harming the nonprofit sector and higher education
- A scenario where economy opens to quickly and leads to a 2nd wave of the virus would reverse the recovery
- Recovery will be uneven, with manufacturers rebounding more quickly than travel and hospitality
- In his opinion banks shouldn’t be issuing large dividends now
- Rural healthcare systems were already under pressure and virus is exasperating that trend
- Parts of the agricultural sector already under a lot of stress and crisis will not help
Minneapolis Fed Gov. Kashkari Speaking
- Fed policymakers have been pretty unanimous and opposing negative interest rates
- He does not want to say never with regard to negative interest rates, but there are other things Fed could do first
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ABOUT THE AUTHOR
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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst.
Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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