Negative Interest Rate Watch

Most recent item re: negative interest rates I have come across:

TGA = Treasury General Account

Momentarily, I will be pulling historical items from the prior AO thread, and other stuff.

The AO thread was started by MathGeek92 in January 2016.

Here was the state of play at the time.

Mish’s comment in February 2016:

Negative Interest Rate Club

  • Eurozone: European Central Bank (ECB)
  • Switzerland: Swiss National Bank (SNB)
  • Sweden: Swedish National Bank (Riksbank)
  • Denmark: Danish National Bank (Nationalbanken)
  • Japan: Bank of Japan (BoJ)

Right Over the Cliff


In the inane attempt to get consumers to spend more money and to stave off threats of consumer price deflation, central banks keep punishing the prudent as well as those on fixed incomes.

Low interest rates foster economic bubbles. And it’s asset deflation not CPI deflation that central banks ought to fear. Even the BIS agrees with that statement. For discussion please see Historical Perspective on CPI Deflations: How Damaging are They?

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

My January 20, post Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations following a buildup of bank credit on inflated assets.

Mike “Mish” Shedlock

Can the Fed do nominal negative rates?

Magic 8 Ball says “No… unless Congress changes things”

Fed May Lack Legal Authority for Negative Rates: 2010 Memo

August 2010 memo highlights possible hurdles to negative rates
`Not at all clear’ law allows Fed to charge negative rates

The Federal Reserve may not have the legal authority to set negative interest rates in the U.S., according to a 2010 staff memo that was posted late last month on the central bank’s website.

The document, which is dated Aug. 5, 2010, and was publicly released on Jan. 29, suggests the law that authorized the Fed to pay interest on excess reserves, or IOER, may not grant it the authority to charge interest. That could constrain the central bank’s ability to take interest rates below zero, though it might be able to find a work-around.

Speculation has increased that the Fed might consider negative rates in the next economic downturn as concerns of a U.S. slowdown have mounted. This also follows recent moves to cut borrowing costs below zero by central banks in Europe and Japan that show it can be done. The opinion of Fed staff back in 2010 was that this would difficult under U.S. law.

“There are several potentially substantial legal and practical constraints to implementing a negative IOER rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero,” the authors wrote. “Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.”

The Fed did not immediately respond to a request for comment.

I am not going to capture the comments of people who aren’t me… who are still living.

JMO (aka Carol Marler) died in February 2019. So I’m going to copy her comments from the AO thread.

Post 1:

I agree with your interpretation [referring to Riley aka whoanonstop]. And I just want to add that both negative interest rates and deflationary environments are very.bad.things.

Post 2:

A little bit of context for your first sentence. For those of us who rely on our investments, low interest rates are bad. Negative interest rates are very bad. Maybe not so much for the rest of the world, I will admit.

As for the rest, I guess I’m agnostic about it, but from what I’ve read about the 1930s, it seems that in that time frame, deflation was just one part of a very bad circumstance for a lot of people. Economic depression - Wikipedia

Post 3: [Feb 2016]

I remember when interest rates were double digits. The big worry was disintermediation if rates continued to rise. But it did occur to me to think there might eventually be a problem should rates go down to the point where it was tough to meet contract guarantees. The basis for that worry was reading about WWII government controls that forced interest rates way down and led to some insurance companies having to strengthen reserves.

It’s always appropriate to consider past nightmare scenarios when looking toward future risks. . . Sometimes bad history repeats itself (with variations).

Those were all her comments on the thread.

I will be bringing in other links later.

A few more items from the old AO thread. I’m not posting these in chrono order.

From August 2020:


Negative Outlook on Negative Rates
While the traditional take on negative rates is to dismiss them as unworkable, at least in the US, the subject keeps cropping up. And not just as a hypothetical. At one point in the spring, Fed Funds futures, which give a window into what the benchmark rate might do in the future, showed negative numbers next year and the following. A dozen contracts maturing from April 2021 through March 2022 were priced to show a rate of between minus 0.01% and minus 0.025% at contract expiration.

Fed Chair Jerome Powell has made a point of saying the central bank was not looking at heading into negative territory. That echoes a longstanding stance by the Fed, whose policymaking committee in October termed the negative concept ”not attractive.”

Powell said the Fed preferred alternatives such as forward guidance—that is, policymakers signal to the debt markets how long current rates will stay in place—and massive asset purchases, also known as quantitative easing, or QE. “We’ve said that we continue to rely on those tools that are tried, and they are now a part of our toolkit,” he said.

The strongest case against negative rates in America revolves around the special status of the US dollar, which is the globe’s reserve currency and is used in the vast bulk of financial activity internationally. “Our money markets are a major financial intermediary,” said Jim Keegan, CIO and chairman of Seix Investment Advisors. The fear is that trade and money transfers would get messed up. Plus, he said, with negative rates, the US’s insurers and pension funds, which invest for the long-term, would have a tough time figuring out future values of their assets.

More from the old AO thread:

From February 2016:

March 2016:

More March 2016:

This wasn’t in the old AO thread (I think)

I wrote a letter-to-the-editor for the WSJ in 2016:

When I got to the end of “The Sinister Side of Cash” (Review, Aug. 27), I felt like I was in a Scooby-Doo episode, with the demasked villain proclaiming, “I would have been able to get monetary policy to work if it weren’t for those pesky kids and their cash!” It is farcical watching various central bankers persist in their failed strategies regarding negative interest rates without the subsequent desired results. As with Marxists claiming that true communism has never been tried, it looks like the current excuse for these bankers is that their strategy won’t work until cash is obliterated.

Mary Pat Campbell

Croton Falls, N.Y.

Negative real rates: [as opposed to nominal rates]

Germany’s biggest lenders, Deutsche Bank AG and Commerzbank AG , have told new customers since last year to pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

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what is going on with US interest rates the last 2 weeks? I feel like something hit a tipping point and rates have jumped up on 2 separate occasions.

I’m just trying to get my refi locked in before this moves too much…

I just closed on mine last week. good luck-

I’m trying to get this done before April 1… and I’m looking at an auto loan now, too… fingers crossed.

I am still quite proud of our 1.875% 7/1 ARM from 03/2020. Really lucked out on that one!

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I was tempted by the 7/1 ARM rates…

I ended up going 15 yr conv. It sounded like UW was going to be more difficult for ARM.

We had no indication of differing UW concerns and the 7/1 was lower. I expect it go up to at least 3.0 after 7 years, but we’re planning to pay it off in 10 regardless so I wasn’t concerned.