The Fed Floats Negative Interest Rate Trial Balloon - from TRUNEWS

On the heels of The Bank of Japan’s recent move to implement negative interest rates, Bloomberg is reporting that The Federal Reserve is now inching towards making a similar move:

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

Japan made the move in order to stimulate economic factors in a declining global economy.  The move came as a shock to investors worldwide, however, it did open the door to other nations making similar moves.

The European Central Bank has made several reductions in recent months as well.

The December rate hike by The Fed seemed counter-intuitive to a number of analysts, who saw trends that the US economy was hobbling along.  The interest rate hate did serve to spike the markets for several weeks, but as retail numbers from the new year began to come to light, the markets have struggled to regain any traction.

The idea that The Fed is even considering the scenario of negative interest rates indicates that their confidence in boasts of a ‘booming’ economy were short-sighted as best, and deceptive at worst.

NEGATIVE INTEREST RATE POLICY (NIRP)

Negative interest rates are simply a tax or fee on deposits.  The depositor pays for the privilege of the financial institution to hold their money.

During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic stagnation. However, if deflationary forces are strong enough, simply cutting the central bank’s interest rate to zero may not be sufficient to stimulate borrowing and lending.

A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

 

 

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