Short of shouting “no” at appearances or putting out press releases in all capital letters, the Federal Reserve can’t make it clearer it is not planning on employing negative interest rates. Yet some continue to think it might, as fed funds futures for early 2021 had recently been trading in slightly negative territory.
It’s understandable the subject would come up after the Fed dropped rates to the zero bound amid its aggressive action in the face of the coronavirus pandemic. There is precedent as other reserve banks—most notably the European Central Bank and the Bank of Japan—have used negative rates for years. But these examples actually are much of the reason U.S. policymakers want to avoid them because they have not proven effective in raising inflation or accomplishing other desired economic outcomes.
Fed Chair Jerome Powell was the latest to dispel the notion in a webcast last week. He again emphasized that Federal Open Market Committee participants favor using their present tools to their fullest extent, including forward guidance, quantitative easing and special lending facilities. They feel these support market functioning, supply ample liquidity and provide policy accommodation. If anything, the Fed might increase their use, as Powell cautioned that the recovery may not happen as quickly as many have anticipated. But the markets likely will continue to question the Fed’s stance against negative rates, so expect to see more pushback in the future.
It also is understandable that investors wonder what the impact of Treasury bills trading with negative yields would be on money market portfolios. With the Fed against pursing an official negative rate policy, we have confidence these episodes will not be prevalent and believe we will have many other investment options offering positive yield to offset them. It is important to remember that the Treasury Department cannot auction securities with negative yields and that operational hurdles may discourage certain segments of the repo market from printing in negative territory. These are unprecedented times, however, and the money market fund industry has been exploring precautionary operational changes and regulatory approvals.
