Is The Federal Reserve Really Thinking About Negative Interest Rates?!

Is The Federal Reserve Really Thinking About Negative Interest Rates?! by Chris Marcus – Miles Franklin

At the same time the Federal Reserve claims it’s going to raise interest rates and normalize its balance sheet, it’s also publishing an essay advocating negative interest rates.

It’s almost so incredible that were it not published on the Fed’s own St. Louis branch website, it might be hard to believe it’s true. But apparently St. Louis Federal Reserve economist Yi Wen disagrees with the projected Fed mantra that it’s time to raise interest rates. Because he actually just wrote an essay explaining what negative interest rates are, and how it could be a perfect next move for the Fed.

In his essay Wen mentions how “conventional monetary theory always assumed that the policy rate cannot go below zero because an individual would not pay, in theory, to lend out his or her own money.”

Which makes enough sense. After all, why would you lend out $100 with the hopes of receiving $97 or $98 in return?

And that’s your best case scenario. You also have the credit risk of the U.S. banks and banking system. Not to mention that you’re going to be receiving dollars that are worth less by the time that you actually get them.

So the idea of negative interest rates is as ridiculous as it sounds. The fact that the European and other central banks have implemented it doesn’t make it any better.

However what’s interesting to note is what Wen himself cites as a reason why anyone would invest in such fashion.

“The central bank can also require (by law) large corporations to keep their cash, savings and loans in the banking system when a negative interest rate policy is implemented. The same argument applies to commercial banks that deposit their cash in the central bank.

It’s a terrible deal. So how do you get somebody else to take the bad half of the trade? By legislative force. His argument isn’t how it’s a good option for savers, but rather that someone created a law strong-arming certain parties into a bad deal.

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