Yellen hinted at possibility of negative interest rate
A negative interest rate policy (or NIRP) may still be a far-fetched idea in the United States, but the Federal Reserve wants banks to prepare for it. In a testimony to the U.S. Congress last week, Janet Yellen, chair of the Federal Reserve, said the central bank is looking into the possibility of reversing the course of their monetary policy and possibly considering a negative interest rate if the situation arises.
In a recently issued report, the Federal Reserve issued rules for stress-testing scenarios for US banks that include negative interest rates. US banks such as JP Morgan (JPM), Wells Fargo (WFC), Citigroup (C), and Goldman Sachs (GS) have to conduct annual stress tests. While these scenarios are hypothetical, including negative interest rates suggests that the Fed may be considering it after the steep fall in the Market since the beginning of 2016.
A move to negative interest rates would be a first for the United States. The policy is already implemented in the European Union (FEZ) and more recently in Japan. The European Central Bank has moved to negative interest rates for a year now in an effort to stimulate the economy and fight deflation. More recently, the Bank of Japan adopted the negative rate policy to bring the economy back to normal. Japan’s decision to implement negative interest rates follows three years of monetary easing to end two decades of stagnant growth and low inflation. Switzerland, Denmark, and Sweden have all implemented NIRP to stimulate their economies.
In this series, we’ll see what NIRP means for the financial sector and how these negative interest rates will affect banks and insurance companies. We’ll also look at how NIRP helps stimulate the economy and why central banks adopt it.
In the next part of the series, we’ll see how NIRP could stimulate the economy.