Fed not considering negative rates – Powell

US Federal Reserve Chair Jerome Powell stressed today (May 13) that the central bank was not considering implementing a negative interest rate policy, despite some market expectations of such a move.

He also said the economy could be in for a “extended period” of weak growth and depressed incomes, warning that its lending policies would only be effective “for a while” and that more fiscal support may be required.

Powell’s comments on negative rates followed market activity last week that signalled investors were betting the Fed’s target interest rate, the federal funds rate, would go below zero by the end of the year.

President Donald Trump has also recently refocused some attention onto the central bank, urging it to lower rates further. “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!” he tweeted on May 12.

But in remarks during a Peterson Institute for International Economics webcast, Powell said: “This is not something that we are looking at … We think we have a good toolkit, and that is what we will be using.”

The evidence behind negative rates was “very mixed” and the ongoing debate “unsettled”, he added, citing concerns about disrupting the financial intermediation process and bank profitability, which could limit credit growth.

Fed staffers briefed the Federal Open Market Committee on negative rates at the October 2019 meeting. The minutes show that “all participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States”.

Some Fed officials speaking separately on the subject more recently have also made remarks consistent with Powell’s. In March 2020, Federal Reserve Bank of Minneapolis president Neel Kashkari said: “I don’t think there’s much interest in going below zero.” However, he added that “none of us want to say no, never”.

Also in March, Cleveland Fed president Loretta Mester said she was “sceptical that the benefits of negative rates would outweigh the costs in the US”. Fed governor Lael Brainard and Dallas Fed president Robert Kaplan have also raised comparable points this year. 

Prolonged weak economy

Powell suggested that, instead of negative rates, the Fed’s focus would be on making sure its lending programmes were successfully launched to provide the real economy with the liquidity it needed. Despite warning that the US economy could be in for a prolonged period of weakness, he said the central bank’s lending policies would only be effective during the short term.

Fiscal policy might have to be ramped up if the downturn continued for an extended period, he said.

“It will take some time to get back to where we were,” Powell said. “There is a sense – a growing sense, I think – that the recovery may come more slowly than we would like. But it will come, and that may mean that it’s necessary for us to do more.”

The lending programmes, such as the soon-to-be-implemented Main Street Lending Program, are only authorised to lend to solvent businesses that don’t have access to other sources of credit. The longer the lockdown measures continued, the greater the chance that firms’ liquidity problems would become solvency problems, the Fed chair warned.

“We will be a big help for companies for a while, but over a longer period of time, it may be that more fiscal help is needed,” said Powell.