The Fed Shouldn’t Even Discuss Negative Interest Rates Next Week

  • The Federal Reserve’s FOMC meets on Wednesday.
  • Given soaring unemployment, some economists are calling for negative interest rates.
  • After years of failed policy in Europe and Japan, the U.S. should steer clear of this deflationary death-trap.

The Federal Reserve meets next Wednesday, as the FOMC will decide on interest rates, which currently sit at record lows in the 0% to 0.25% band.

Given the enormous economic damage to the United States from the coronavirus shutdown, some analysts are calling for negative rates. Here’s why Jerome Powell should resist taking the plunge into this unchartered territory.

How Did Negative Rates Work Out In Europe Or Japan?

Japan, Denmark, Sweden, and the Eurozone. What do all these countries have in common? All their central banks have employed interest rates below zero. Have their policies been effective in rejuvenating their economies? Absolutely not.

There is no evidence that the United States would benefit from employing these same tactics.

After a decade of world-leading economic stability, the U.S. economy has demonstrated its resilience and diversity.

As the coronavirus takes a massive chunk out of the global economy, few countries had any meaningful stimulus bullets left to fire to counteract the downturn.

The United States did, and credit to Jerome Powell and the FOMC for standing up to Donald Trump’s bullying.

The situation would have been a lot darker had the President been able to make interest rates zero while the economy was booming right before such a dramatic downturn.

Faced with unprecedented layoffs and a massive contraction in GDP, the FOMC has expanded its balance sheet in the most dramatic fashion ever, above $6 trillion, with some forecasting it could go over $10 trillion.

Source: Board of Governors of the Federal Reserve System (U.S.)

They also slashed the prime rate to the 0 to 0.25 percent bound. All this is justified in the eyes of Powell, who is doing his equivalent of Mario Draghi’s famous…

Source Link

Advertisements