Investors have been virtually cowering in fear at the thought of negative interest rates, but well-known economist Dave Rosenberg of Gluskin Sheff says fear not. He doesn’t think the U.S. Federal Reserve needs to implement negative interest rates to dig the economy out of the hole it’s fallen into. In fact, he doesn’t think such a plan would work even if policymakers tried it and emphasized earlier this week that he doesn’t think the Fed is “out of ammo (just yet).”
Signs of trouble with negative interest rates
It’s understandable that Mr. Market lives in fear of negative interest rates as, in theory, they probably wouldn’t work. We’re already seeing signs of this in Switzerland where the central bank moved rates more negative. In response, the nation’s banks have raised mortgage rates because the further reduction in net interest margins has weighed heavily on their earnings.
As Dave Rosenberg noted on Tuesday, this indicates “that there are issues in terms of the policy transmission mechanism with respect to negative rates.” One bit of good news for the world is that the European Central Bank has “absolutely no intention, no interest” in negative interest rates, according to Gov. Mark Carney.
Negative interest rates wouldn’t work anyway
This is especially good news as we’ve heard the Fed mention negative rates, although there has been nothing serious that makes us think the U.S. central bank is desperate enough to try it although other global central banks are pulling out all the stops in desperation. Dave Rosenberg references articles in The Economist which explain that negative interest rates aren’t the answer to solving the deflation and low growth period we’re in. He also points to two other areas as more examples of why they won’t, “seeing as demand for credit, at least in the euro area and Japan, is tepid at best,” he wrote.
“To whom are the banks supposed to lend to when households and businesses are still repairing debt-stretched balance sheets?” he added.
The answer, Dave Rosenberg says, is “marrying fiscal and monetary policy,” which The Economist suggested could be done by the government selling bonds to the central bank, thus bypassing banks, and then cutting taxes or boosting outlays (or both) by using the proceeds.
He added that the Fed won’t have to adopt negative interest rates, which would have massive negative impacts on the banking, pension and money market industries, recalling a famous speech given by former Fed chairman Ben Bernanke in 2002. Bernanke suggested other options like setting a max rate for long-term interest rates, lending to the private sector through “the discount window,” or offering banks free fixed-term loans using anything from mortgages to commercial paper as collateral.
Indeed, the topic of why negative interest rates won’t work has been a hot one lately with a multitude of voices speaking up against them.