If current low rate, low inflation environment continues, negative rates could become a ‘regular feature’ of U.S. monetary policy – FINANCIAL NEWS-ecozik.com
Home / Insurance Tips / If current low rate, low inflation environment continues, negative rates could become a ‘regular feature’ of U.S. monetary policy

If current low rate, low inflation environment continues, negative rates could become a ‘regular feature’ of U.S. monetary policy

If it ever came to it, the Fed could deploy negative rates in the U.S., even the financial climate in the country offers a few obstacles to such policy.

When discussing negative interest rate policy, the U.S. Fed isn’t usually among the list of prospective central banks which are likely to deploy negative rates.

New York Fed President William Dudley recently said that any suggestion the Fed may go negative is “premature.” Speculation about who might be next to go negative has been on the rise this year following the Bank of Japan’s adoption of negative rates in January.

There are unique hurdles to implementing negative rates in the U.S. compared to another countries, particularly due to the existence of the $2.6 trillion held in constant value, dollar-in-dollar out money market funds. The Fed has warned before that negative rates could disrupt the marketplace, which helps fund banking institutions in the united states.

But Citi notes that the Fed could conceivably protect the MMF market by shielding it from negative interest rates, much like what’s been done in some European countries to safeguard bank profitability in a negative rate environment.

So if that obstacle was removed, would it make sense at all for the Fed to think about the policy?

Not within the near-term, says Citi, however, if the current low rate, low inflation environment continues, the Fed might be instructed to go negative somewhere down the road.

“If the Fed choose to ease monetary policy in the near-term (say, over the next six months), we suspect it would choose forward guidance or, following a 25bp rate cut, further asset purchases (QE),” said Citi analysts in a note.

If that isn’t enough to stoke the economy, in the medium-term, Citi sees negative rates becoming a “regular feature” of U.S. monetary alongside further asset purchases.

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