Negative rates have not worked for the ECB, Sweden, Japan, or Switzerland. Nonetheless, Fed Chair Janet Yellen is back on that idea today in Congressional testimony. Specifically, Yellen Says Fed Evaluating Possibility of Negative Rates in US.

“We had previously considered them and decided that they would not work well to foster accommodation back in 2010,” Yellen said Thursday, answering questions during a second day of testimony before Congress. “In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation.”

A 2010 Fed staff memo posted on the central bank’s website late last month showed Fed economists grappled with a number of issues related to implementation of negative rates at the time, including possible legal obstacles. Yellen said Thursday that negative rates might be legal, but the question remained open to further examination.

“I am not aware of any legal restriction that would mean that we could not establish negative rates, but I will say that we have not looked carefully at the legal side of this,” Yellen said Thursday.

“We haven’t finished that evaluation,” Yellen said. “We need to consider the U.S. institutional context and whether they would work well here. It’s not automatic. There are a number of things to consider. So I wouldn’t take those off the table, but we would have work to do to judge whether they would be workable here.”

Negative Interest Rate Club

  • Eurozone: European Central Bank (ECB)
  • Switzerland: Swiss National Bank (SNB)
  • Sweden: Swedish National Bank (Riksbank)
  • Denmark: Danish National Bank (Nationalbanken)
  • Japan: Bank of Japan (BoJ)

Low Rates and Asset Bubbles

Low interest rates foster economic bubbles. Those bubbles always do two things.

  1. Get bigger than anyone expects
  2. Burst

When economic bubbles burst, asset deflation sets in.  And it’s asset deflation not CPI deflation that central banks ought to fear.

For discussion please see Historical Perspective on CPI Deflations: How Damaging are They?

The Fed (central banks in general) blew another set of asset bubbles that are popping left and right before our eyes, starting with junk bonds in the energy sector. Bank stocks and European peripheral bonds are also under attack.

Now, central banks are clueless as to what to do. Their only answer has been to cut rates to negative territory. That tactic hasn’t worked, and it won’t. But it has fueled a nice rally in gold and precious metal miners.

Mike “Mish” Shedlock