• You will need to login or register before you can post a message. If you already have an Agriville account login by clicking the login icon on the top right corner of the page. If you are a new user you will need to Register.

Announcement

Collapse
No announcement yet.

Negative Interest Rates

Collapse
X
Collapse
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Negative Interest Rates

    From ZIRP to NIRP: What's the Fed's next move?



    Negative interest rates in the U.S. may seem like a far-fetched idea, but the Federal Reserve is telling banks to prepare, just in case.

    For the first time ever, the governing agency and U.S. central bank is requiring banks to include, in a round of stress tests commencing this year, to prepare for the possibility of negatively yielding Treasury rates. The scenario is purely hypothetical and not a forecast, according to a Jan. 28 Fed news release .
    However, the development is part of a larger scenario of a world where zero rates are morphing into negative rates.

    This is how beggar-thy-neighbor monetary policies work, and perhaps why they ultimately fail.
    One nation mired in an economic slump decides that the best way out is to devalue its currency, cheapening its exports and thus making them more attractive in countries that have higher-yielding currencies and, consequently, more buying power.
    Seeing the success that country has, another seeks to emulate. And then another. And another. And another. In order to stay ahead of the game, central banks keep devaluing until there's nothing left, tangibly at least, to devalue, and negative interest rates come into play.
    Read MoreWill negative rates deck Japan's banks?
    Pretty soon you have nearly a third of all sovereign debt holding negative yields. In turn, what seemed like a powerful tool to stimulate lending and export-led economic growth becomes a toothless tiger that global central banks continue to deploy, the latest being in Japan. Suddenly, zero interest rate policy, or ZIRP, has morphed into negative interest rate policy, or NIRP.

    This is no dystopian hypothetical. This is what central banking has become in a global economy beset by meager growth.
    Worries are growing that the Federal Reserve soon could bring NIRP to U.S. rates. Japan went to NIRP last week, and the yield on the 10-year Japanese government bond went negative overnight Monday for the first time ever.
    "It appears that NIRP is becoming the main policy tool for a number of major central banks as they battle falling inflation, rising currencies and economic weakness," Jeffrey Kleintop, chief global investment strategist at Charles Schwab, said in an analysis. "The effectiveness of slightly negative interest rates is far from assured, and increasingly negative interest rates may not just weigh more heavily on the stock market, but on drivers of economic growth as well."
    Read More Negative rates in US? Here's why it could happen
    Indeed, ZIRP seemed to pull stock markets higher, but the spreading of NIRP has coincided with a sharp global equity decline, particularly in financial stocks.
    The Fed's chances of going to NIRP seem, at least now, to be slim. Its policymaking arm, the Federal Open Market Committee, just hiked its interest target in December for the first time in nine years, so changing now would seem like a stunning retreat.
    Yet several high-ranking officials recently have paid at least lip service to the idea.
    In a speech last week, Fed Vice Chair Stanley Fischer said Europe's experiment with negative rates is "working better than I expected," raising speculation that should things deteriorate the U.S. central bank would consider going negative.
    Negative rates in the U.S. would begin with the interest paid on excess reserves that banks store at the Fed, a number currently at $2.15 trillion that earns 0.5 percent interest. The idea would be to charge banks to store reserves, making the cost prohibitive to let the money lie fallow there and push it into the broader economy through lending, thus stimulating growth.
    It's an idea that works in theory and, for a period, worked in practice for the four European governments that tried it. However, there are problems.
    Read More The recession signal investors may be missing
    One is that banks would need to make up that lost revenue someplace and instead of lending could amp up fees and rates. Another is that the more countries that join in, the less effective one nation's low or negative interest rates are.
    Finally, in a problem that would be especially acute in the U.S., negative rates could send a jolt through the $2.75 trillion money market space and, some fear, lead to a "break the buck" scenario that occurred during the financial crisis when one large money market fund couldn't return par on its investments.
    "Things would have to get truly desperate to go to negative rates," Kim Rupert, managing director of global fixed income at Action Economics, said in an interview. "Our money markets are obviously the biggest in the world and have a lot of commitments tied to them and the liquidity for a lot of our economy. Jeopardizing the money markets would be too dramatic an effect for the Fed to consider going in that direction."
    Still, the futures market is indicating that if the Fed doesn't move to outright NIRP, the chances for an aggressive rate-hiking policy ahead, as indicated after the December rate rise, are nil.
    The CME's FedWatch tool briefly went into a kind of backwardation Monday, indicating a -2 percent chance for a rate hike at the March FOMC meeting (the probability quickly moved back to plus-2 percent). The tool's farthest date, February 2017, indicates just a 15 percent chance of an increase, the implication being no moves in 2016 even though the Fed's "dot plot" of official projections points to four hikes this year.
    The actual fed fund futures curve does not indicate a rate rise fully priced in until December 2017.
    Michael Darda, chief economist and market strategist at MKM Partners, thinks the Fed would be wise to heed market signals and pay less attention to its models, including the Phillips curve guideline, that indicate a faster tightening cycle. The Fed's moves to end ZIRP and quantitative easing, along with China's decision to peg the yuan to the dollar, "has translated into a tightening world monetary policy" similar to what happened in the 1930s.
    "The current risk is that policymakers are overly optimistic about the business cycle carrying on in a way that allows inflation to return to its target," Darda said in a note to clients. "Given the U.S. dollar's reserve currency status and the PBOC's quasi peg, global monetary conditions have tightened sharply, causing world nominal growth expectations to weaken. There are some disturbing parallels to 1937, in our view, that should continue to be monitored closely."
    What the Fed will need to weigh ultimately is whether going to NIRP is worth risking its credibility, and whether low or negative rates will have any discernible effect on financial conditions. Bank stocks already are in a bear market, the economy is slowing and damage from the energy sector clearly is seeping into other parts of the economy.
    Moving to NIRP now might be regarded as a panic reaction that actually could make things worse.
    "I don't think there are high odds that we're going to fall into a recession this year, but what if we did?" said Jim Paulsen chief investment strategist at Wells Capital Management.
    "If we went into recession now, when you had a zero short rate effectively and a sub-2 percent 10-year Treasury and a $4 trillion Fed balance sheet to spin out and a debt-to-GDP ratio that's 100 percent on sovereign government debt, I think there would be a fair amount of panic in the cultural mindset because there would be a sense that we went into recession and there's nothing anyone could do about it," he added. "That's a dangerous situation to put yourself in."

    #2
    Oh for god sakes,these guys drive me nuts.

    If the ten year is running at 1% and inflation is 2% what are real nominal rates?Or gdp?

    The rates always have to be BELOW.

    That is the simple math of what needs to happen.

    Until things really fly apart and that spread has to widen.

    The system demands it mathematically

    Them guys ever wonder about carry trade?

    or the fact we are talking about central bank monetization of debt and interest rate bench marks as if it was a normalcy instead of free market forces?

    this is insanity

    Comment


      #3
      Whoop whoop! NIRP! Now I get to borrow moar munny!!

      Let's keep this party Goin!

      Comment


        #4
        Pull the cookie jar from under the bed that cash is going to soon be deemed illegal and obsolete.

        Comment


          #5
          Negative interest a bigger threat in Canada than the US. The US economy while sluggish is a powerhouse next to the basket case that Trudopistan and the rest of the world is. Canada is busy exporting all our used cars and equipment to the US right now helping our exports. When the supply of them is gone, then what we gunna do? On the plus side, Edmonton has 60 cent gas now so that is helping slow down inflation.

          Comment


            #6
            ajl , i find that interesting also . our local GM dealer is bragging about sending all the used diesel trucks to the US. when we wanted to buy from the US a few years back we were assholes according to that same dealership . even got a call from GM canada about it . made you jump through several hoops to do it and made it as hard as possible.buts its all fine and dandy for them to export all the good used trucks . wonder if GM CANADA OR GM USA is worried about this now

            Comment


              #7
              The U.S. is already in-recession (IMO). Janet Yellen and the Fed are now becoming a sideshow as their power to manipulate markets has diminished considerably.

              The Fed has underestimated the impact of global markets on their economy.

              Comment


                #8
                Yet the local C.U. said their loan rates to us will not change..
                Only if your a person with savings, that will be zip...

                Comment


                  #9
                  Major structural problems in the world economy are now becoming very apparant. 2016 is going to be a wild ride.

                  Comment


                    #10
                    Who is in worse shape Errol US or Canuckistan? My vote is we are by a long shot going forward. I agree the FED is pretty much irrelevant as is the B of C. Poloz as much as admitted the ship is sinking and nothing he could do. The last bit of inflation caused by tanking the $Cdn last year prevented Canada from being in official recession all year last year but every economy in the world is shrinking in $USD term. If the US goes down (and it might be) now it is all over.

                    Comment


                      #11
                      ajl, the next U.S. recession may be one-for-the-ages. The service sector is now contracting which is the last straw. Fallout in the U.S. has now given the loonie a bullish hue . . . 75 cents sometime ahead? This could spark a recovery in crude oil, just a matter of time IMO.

                      U.S. its in for a rough economic times. . . .

                      Comment


                        #12
                        Japan has been through 5 recessions in the past 10 years. Get used to this. Canada because the Harper Gov did not specifically use QE and negative interest rates... is in comparatively good shape fiscally vs the G7. Now the Liberals have room to spend 80B$ and improve infrastructure... to improve efficiency... low oil will cause a big fall out for Oil co's... but every one else wins... not connected to big oil. Since they [big oil co's]were only 12 percent of the economy... and they are being singled out for a hair cut anyway... all is well that ends well.

                        CDN$ easily ends back at $.80 in a year or so... depends how much Trump pushes the US$ down. If Trump is aggressive... and the US$ goes down big... we will be at par.

                        Good news is... Trump likes Canada.

                        Comment

                        • Reply to this Thread
                        • Return to Topic List
                        Working...