One week before the BOJ shocked the world by adopting negative interest rates and unleashed the next leg lower in global risk assets, it warned everyone “please not to worry, all is under control”
Moments ago at least Yellen had the courtesy of “warning” market participants in general, and banks and savers in particular that legal, logistical or monetary concerns aside, the Fed isalready evaluating the possibility of negative rates.
“We had previously considered them and decided that they would not work well to foster accommodation back in 2010. In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation.“
As Bloomberg reported first earlier this week, a Fed staff memo posted on the central bank’s website last month showed Fed economists grappled with a number of issues related to implementation of negative rates at the time, including possible legal obstacles. Yellen said Thursday that negative rates might be legal, but the question remained open to further examination.
Among the other concerns were whether the Fed has the logistical capacity to implement NIRP:
… the Federal Reserve computer systems used to calculate and manage interest on reserves do not currently allow for the possibility of a negative IOER rate, although these systems could be modified over time if needed.
And a further concern about NIRP is the potential lack of physical cash:
DIs might opt to shift a significant quantity of their reserve balances into currency.Present Federal Reserve inventories of currency, at about $200 billion, would not be adequate to cover large-scale conversion of the nearly $1 trillion in reserve balances to banknotes.
This is what she added today:
“I am not aware of any legal restriction that would mean that we could not establish negative rates, but I will say that we have not looked carefully at the legal side of this.”
So she is “aware” without actually looked into it. That’s ironic because it just happens to be standard operating procedure for the Fed regarding pretty much everything.
And finally there was this:
“we don’t even know if payment systems will be able to handle negative rates.“
Surely that is a minor obstacle. Ultimately the Fed will do whatever the banks tell it to do, and furthermore let’s not forget what Ben Bernanke himself said last month:
“I think negative rates are something the Fed will and probably should consider.”
We agree with him, and in a worst case scenario where Goldman and JPM decide that NIRP is not the “best option”, there is always QE4 – after all we know there are no legal or logistical issues with that.
In any case, at least one person is happy today.