Fed Reserve Policymakers Ruled out the Provision for Negative Rates

United States Federal Reserve policymakers announced that it would do the best way to push money into the failing economy, which has been sharply affected by the widespread lockdowns due to the spread of the coronavirus pandemic. However, fed officials warned that it has eliminated the concern of providing negative rates for lenders in the country as it would be risky for the country’s financial situations in a long run.

No Negative Rates

Chicago-based Fed President, Charles Evans told a meeting of the Lansing Chamber of Commerce, held via Zoom, “We must do all we can so that economic activity can resume once it is safe to do so and focus our efforts on returning to prosperity as quickly as possible.” However, he insisted that interest rates would be very close to zero for “quite some time,” but denied the provision of allowing a negative rate. In words, he said, “I don’t anticipate it being a tool that we would be using in the US.”

Last week, traders that are tied to the Fed’s policy rate began pricing in, for the first time ever and suggested a small chance of negative US interest rates next year. On Monday, fed policymakers made it clear that no below-zero rates would be allowed as it suggested that adopting such a tool could have the opposite of the intended effect or undermine financial markets.

Central banks in other countries, including Europe and Japan, have introduced the policy of negative interest rates keeping a view that such policy aimed to punish banks for holding excess cash and thereby to encourage lending, in turn boosting business investment and consumer spending.

Ineffective and Problematic

Analysts warned that negative rates would be particularly ineffective in the current crisis because it was not the price of money but rather government restrictions and concern for public health that kept people and businesses from spending money.

Similarly, speaking on Yahoo Finance, St. Louis Fed President James Bullard said that the US economic structure of short-term funding markets was different than in Japan and Europe, using negative rates would be “problematic.” On top of that, he insisted, “It is not at all clear that they’ve been successful there…we can use other tools to handle the situation.” Similarly, Atlanta Fed President Raphael Bostic said on Monday that negative rates were “among the weaker tools in the toolkit.”

Ahead of a Senate Banking Committee hearing on Tuesday, May 12, 2020, Fed’s Vice Chair of Supervision, Randal Quarles released a statement that praised banks for boosting lending during the crisis.

However, he warned that the real limit on what banks could do for the overall health of the economy that would depend on the effectiveness of the public health response. Quarles added, “More may be required of us before the current crisis ends,” adding that “We can only pledge to do what this moment demands.”

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