The argument for negative interest rates in the US has strengthened, Goldman says
- The case for
negative interest ratesin the US has strengthened, according to a note from Goldman Sachspublished on Tuesday.
- While Fed Chairman Jerome Powell has stuck to his position that negative
interest ratesare off the table, negative interest rates to help ease financial conditions would be a helpful tool in a prolonged downturn, Goldman said.
- The UK is the latest country to see the benefit of negative interest rates. The country issued negative yielding debt for the first time ever today.
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The case for negative interest rates in the US has strengthened, according to a note from Goldman Sachs published Tuesday.
The bank said that a deep and prolonged recession would warrant negative interest rates, as asset purchases and forward guidance from
In previous the recessions, the Fed cut interest rates by over five percentage points. So in a recession that sees the unemployment rate at its highest level since the Great Depression, investors would expect the Fed to cut interest rates by more than five points.But because interest rates were so low to begin with, the Fed was only able to cut rates by around 1.50 points.
Still, the Fed and Jerome Powell have been steadfast in opposing negative interest rates.Minutes from a late 2019 Federal Open Market Committee meeting reported, "All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool int he United States." Read more: Tens of billions in redemptions, hundreds of billions in losses: Here's a look at how the hedge fund industry hemorrhaged money in March
Still, they did leave the door open for negative interest rates, saying in the minutes, "... participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates."
So what would it take for the US Fed to consider negative interest rates?According to Goldman:
"For the Fed to reconsider, the recession would have to reach the point where weak demand rather than the virus is the main economic problem, the fiscal response would have to fizzle while the unemployment rate is still very high, and a further step-up in asset purchases would have to lose appeal for one reason or another."
The UK is the latest country to discover the benefits of negative interest rates. Earlier today, the country issued negative debt for the first time ever.Read the original article on Business Insider
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