Up and Down Wall Street

Central Banks Go Negative With Ideas in Short Supply

But so far, the reaction is anything but positive even as Yellen says the Fed doesn’t see sub-zero rates.

By Randall W. Forsyth

It can’t happen here. Negative interest rates, that is. Well, never say never.

In congressional testimony Wednesday and Thursday, Janet Yellen, the Federal Reserve chair, was asked if there was any reason why the U.S. central bank couldn’t set interest rates below zero, as its counterparts abroad have done. While the central bank looked at the matter some years ago and rejected the option then, she said negative rates are a remote possibility.

No matter. The financial derivatives market is pricing in a chance that the Fed could push its interest rate target into negative territory by next year. To be sure, the odds are long, but still that’s the opposite of the received wisdom from policy makers and most economists. The Fed would definitely be raising rates; the only question was how quickly.

Moreover, even where interest rates have been set below zero, they could go deeper into negative territory. As low as minus 4.5% in the case of Europe, according to JPMorgan economists.

Yellen’s message in her biannual policy testimony still was that the Fed was not on a pre-set course of rate hikes and future moves will depend on the economy, and that policy makers would be watching if financial-market turmoil takes a toll on real activity. That’s always been the official line but backs away from comments by Fed Vice Chairman Stanley Fischer last month that four rate hikes this year would be “in the ballpark.”

But the realization that central banks around the globe will keep their key policy rates lower for far longer has produced a stunning repricing in the global government markets that has sent yields crashing to levels far below virtually all forecasts.

Moreover, Sweden’s Riksbank surprised the markets Thursday by pushing its policy rate further into negative territory, to minus 0.5%. That comes after the Bank of Japan late last month sent shock waves by joining the NIRP (negative interest rate policy) club.

But in Thursday’s testimony before the Senate Banking Committee, Yellen reiterated that, while the Fed was studying the possible use of NIRP, there were no plans to implement it. There also are myriad problems with such a scheme.

One of her inquisitors, Sen. Pat Toomey (R., Pa.), noted that NIRP would further squeeze banks’ net-interest margins (the core source of their profits); would threaten money markets (money market mutual funds would likely see massive withdrawals, hampering short-term borrowing by corporations and banks); touch off currency wars, which he said would be won by those who could debase the most, and could set off all sorts of other unintended consequences. For instance, Toomey noted Sweden’s negative rates have inflated a property bubble but the European Central Bank’s NIRP has failed to spur robust growth in euro-zone gross domestic product.

In Japan, he also pointed out that an auction of Japanese government bonds failed. Toomey didn’t mention that the yen has soared 5% since the BOJ imposed NIRP while stocks have cratered—exactly the opposite of the impact the Japanese authorities had sought.

Even so, JPMorgan economists Malcolm Barr, Bruce Kasman and David Mackie write in report that the lower bound for negative interest rates likely is lower than you think.

They note central banks have resorted to NIRP basically because they’ve run out of other options. So-called forward guidance by central bankers to convince markets that rates will remain lower for an extended period has reached the limits of its effectiveness. Quantitative easing (QE, code for central bank securities purchases) also is producing diminishing returns.
Under QE, most central banks also are limited from buying stocks or corporate bonds in size. Finally, the fiscal policy effectively is off the table owing to politics.

Negative interest rates always seemed problematic because depositors could resort to the time-honored mattress, into which physical currency can be stuffed. For banks and businesses, however, resorting to physical cash is impractical and would likely cost more than it would save in interest charges. So far, individuals haven’t been hit with negative deposit rates, likely owing to the probable public relations fallout for banks, which already are hated by the man and woman on the street.

That said, the JPMorgan economists calculate the floor on the ECB’s policy rate would be minus 4.52%; minus 3.45% in Japan; minus 3.27% in Sweden; minus 2.69% in the U.K. but just minus 1.30% in the U.S. In other words, rates could fall further than we currently imagine, they conclude.

As for the ultra-low and negative interest rates now in place around the globe, it might be asked, “How’s that workin’ for ya?” Stocks continue to plunge around the globe with the retreat led by banks, which face sharply reduced profitability as interest rates slide across the yield curve.

The euro has rallied (counterintuitively) along with the aforementioned rise in the yen. That’s the result of the unwinding of so-called carry trades, in which yen and euros were borrowed to fund investments in other, high-yielding investments. In actuality, it may be more a margin call than an orderly unwind, given the viciousness of the worldwide rout.

The only beneficiaries appear to be the top-tier government bonds in investors’ rush for the security of gilt-edged obligations. The benchmark 10-year U.S. Treasury hit a low yield of 1.54% early Thursday, a three-year low, and not far from the record 1.38% hit in 2011.

The other winner is gold, which vaulted past the $1,200 an ounce level, to $1,245, a 4% gain Thursday. If banks are going to charge you for the privilege of holding your currency, thereby guaranteeing you a loss on your deposits, no wonder investors are flocking to gold—the ancient currency that bankers and central bankers can’t debase.

0 comentarios:

Publicar un comentario