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Fed Says No to Negative Rates

by Garrett Kunz   ·  May 21, 2020  
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There’re plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve. And I think it’s an area of real uncertainty in the central banking world.
– Fed Chair Jerome Powell, 60 Minutes interview, 5/13/20

Policy Moves to Support the Economy

The Federal Reserve (Fed) has unleashed a wide range of policy moves to support the economy and keep financial markets running smoothly in the face of COVID-19 related economic weakness. In a series of speeches last week, culminating in Fed Chair Jerome Powell’s appearance on 60 Minutes on Sunday evening, May 19 (recorded on May 13), Fed policymakers have definitively signaled their reluctance to use negative rates as a policy option.

“The Fed certainly has the ability to push rates into negative territory if it wants to,” said LPL Financial Chief Investment Officer Burt White. “But the results have been mixed, and even if it helps borrowers, it can hurt lenders, and even more importantly, savers.”

Negative-Yielding Debt

Negative-Yielding Debt

As shown in the LPL Chart of the Day, there is over $11 trillion in negative-yielding debt right now. Negative-yielding debt creates a topsy-turvy world in which lenders, who usually charge borrowers interest, actually pay borrowers interest instead. This can work if, for example, a certain amount of lending is structurally required, or fees associated with loans provide some added compensation, or lenders anticipate the value of a loan will increase, as bondholders might if they thought rates could fall further.

Source: LPL Research, Bloomberg 05/18/20

While negative rates certainly create an added incentive to borrow, potentially increasing economic activity, as a policy move its impact has been marginal. While borrowers are more willing to take out loans, lenders, primarily banks, are less inclined to create loans and find profitability more challenging when they do.

Making it Easier for Banks to Lend

Banks Lending

The Fed instead has found other ways to make it easier for banks to lend, by loosening some policy constraints and making regulatory changes. Through its various lending facilities, the Fed has also helped create additional lending itself where it is most needed.

It is possible the Fed will have to turn to negative rates at some point. But for now, they are showing that they have a wide range of other policy options at their disposal that can potentially have a more meaningful impact. We are cautious about government overstep into free markets and would be eager to see the Fed step back down the road as assertively as it has stepped up. But until then, we believe the Fed’s decision to avoid negative rates is appropriate, not just because it’s avoiding a tepid policy move, but because it’s pushing them to find better alternatives.

If you have any questions, feel free to reach out.


IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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