A 2nd wave of coronavirus cases could force the Fed to reconsider negative interest rates, Goldman Sachs says

A 2nd wave of coronavirus cases could force the Fed to reconsider negative interest rates, Goldman Sachs says
Federal Reserve Board Chairman Jerome Powell arrives at his news conference following the closed two-day Federal Open Market Committee meeting in Washington, U.S., May 1, 2019.Yuri Gripas/Reuters
  • A "big setback" such as a second wave of virus infections could force the Federal Reserve to reconsider negative interest rates, Goldman Sachs strategist Zach Pandl said Thursday.
  • Fed chief Jerome Powell reiterated Wednesday that such policy wasn't on the table, but "policymakers are going to want to try new things" if the economy tanks further, Pandl told CNBC.
  • The strategist warned that pushing rates below zero could do more harm than good, and that additional fiscal relief will likely arrive before the Fed reverses course.
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The Federal Reserve could reverse its course on negative interest rates if the US economic recovery falters, a Goldman Sachs strategist said Thursday.

The central bank has already issued relief policy of record scope and size to defend against the coronavirus pandemic, but chief Jerome Powell reiterated Wednesday that negative rates were still out of the picture. Where other nations have either implemented such policy or appeared open to doing so, Powell's stance has held strong.

Zach Pandl, Goldman's co-head of global foreign exchange, rates, and emerging markets strategy, still sees a future where the US benchmark rate slides below zero.

"If the economy has another big setback ... where you have a second wave of infections and it would really take the recovery off course, then I do think that that opens up a possibility of a range of additional actions," Pandl told CNBC's "Street Signs Asia."

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Additional fiscal aid from Congress will likely arrive before the Fed takes any additional action, Pandl added, and even then, negative rates serve as a last resort. Cutting the interest rate further could even exacerbate the economic slump, as such policy is relatively untested and could weaken other forms of monetary relief.

"Policymakers are going to want to try new things if the economy is really struggling for a period of time," the strategist said. "So in that scenario, perhaps they can consider it; otherwise I think it's pretty low probability at this point."

JPMorgan analysts made similar claims on Tuesday, warning that any immediate benefits gained from negative rates could quickly give way to long-term dislocations. The bank said it views a negative US rate as "unlikely," and cautioned that even "mildly negative" rates could bring a net negative to the US economy in as little as two years.

Still, the prospect of negative US rates isn't without its fans. President Donald Trump revived calls for such policy on Tuesday, calling negative interest rates a "gift" to participating countries and urging the US to adopt them.

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