The Federal Reserve will probably keep interest rates at zero when it meets this week. But its own ranks are increasingly clamoring for an unprecedented move: sending rates into negative territory.
In theory, negative interest rates would motivate more people and businesses to borrow money, which should stimulate the economy. Critics argue that negative rates would penalize people trying to save money, as well as the big banks by forcing them to make unprofitable loans.
Fed Chairman Jerome Powell has repeatedly resisted pressure to slash interest rates below zero, even as central banks in Europe and Japan have gone negative. Powell has also had to push back against calls for negative rates from President Donald Trump.
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The Fed has already launched trillions of dollars in stimulus to help struggling consumers, businesses and local governments cope with the economic damage from Covid-19, but some economists say it needs to consider subzero rates to achieve a sustainable recovery.
Researchers for the St. Louis branch of the Fed wrote in a report late last month that the combination of “aggressive fiscal and monetary policies is necessary for the United States to achieve a V-shaped recovery.””Aggressive policy means that the US will need to consider negative interest rates and aggressive government spending, such as spending on infrastructure,” said Yi Wen, an economist with the St. Louis Fed, and Brian Reinbold, a research associate, in the report.
Negative rates and more fiscal stimulus could lift economy
Wen and Reinbold argue that negative rates may need to remain in place for years in order to be fully effective.”These policies also need to continue even when the crisis is about to end to provide a further boost, leading to a more robust recovery,” they wrote, adding that there really needs to be both negative rates and more federal government spending.
The Fed can’t do it alone.”Aggressive monetary policy — such as negative interest rates — may be ineffective on its own without aggressive fiscal stimulus,” Yi and Reinbold wrote. Most economists expect the Fed to resist going subzero. But there are still some who say the central bank will eventually follow Europe and Japan down that road.
Bankrate’s chief financial analyst Greg McBride even said in a Monday that he thinks negative rates are “inevitable” in the United States.