Fed’s Powell: No Negative Interest Rates at Next Crisis

The Fed has different priorities than the ECB, the Bank of Japan, the Swiss National Bank, et al.

During the press conference today following the FOMC meeting, Fed chair Jerome Powell was asked if and when the Fed would push its policy interest rate into the negative. Powell did not respond with his usual, “we will act as appropriate.” He had a real answer.

For months, there has been clamoring from Wall Street and speculators, and from the White House, that the Fed should or would cut its policy rates into the negative. Peak of the negative-interest-rate momentum was likely in late August or early September.

Since then, longer term yields have risen across the board, and a substantial part of the $17 trillion in negative yielding debt has turned into slightly positive-yielding debt. So maybe folks are worried that the negative interest rate era is coming to an untimely end, and they want the Fed to step in and save the day.

At the post-FOMC meeting press conference, negative interest rate policy (NIRP) came up in the context of the Fed’s blowing its firepower with these rate cuts before there is even a recession; and then not having much firepower left when that recession arrives. Powell was asked directly about it: Is there “any scenario in which you would envision rates drifting lower into negative territory, and are there any other tools that you could use before having to go there?”

And Powell replied:

“Negative interest rates is something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases.

“Those were the two unconventional monetary policy tools that we used extensively. We feel that they worked fairly well.

“We did not use negative rates. And if we were to find ourselves at some future date again at the effective lower bound – not something we are expecting – then I think we would look at using large-scale asset purchases and forward guidance.

“I do not think we’d be looking at using negative rates.”

So negative interest rates are not happening. Over the years, other Fed officials have expressed their unwillingness to deploy negative interest rates as well – and for good reason.

Negative interest rates are even worse than near-zero interest rates. They have not proven to be beneficial for the economy anywhere where they’re currently in operation, and they entail seriously destructive side effects for the people and the banking system in the country.

However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot, but would need to, print their own money to stay afloat. They did so by making funding plentiful and nearly free, or free, or more than free.

This includes Italian government debt, which has a negative yield through three-year maturities. The Italian 10-year yield is only 0.9%, rather than 7% or 8%, as it was during the Debt Crisis, when Italy was approaching a default, like Greece had already done. The ECB’s latest rate cut, minuscule and controversial as it was, was designed to help out Italy further so it wouldn’t have to abandon the euro and break out of the Eurozone.

The US doesn’t need negative interest rates to stay glued together. It can print its own money.

In Switzerland, Denmark, and some other countries, negative yields are used as blatant currency manipulation, to push down their currencies. That would be tempting for the US as well, but then there is a price to pay – as we can see from the economic doldrums and the banking fiasco in Europe and Japan.

Negative yields have been another blow for the European and Japanese banks hobbling from crisis to crisis, their shares wobbling along multi-decade lows. Negative yields are the final blow for pension and retirement systems. Negative yields distort the pricing of risk, and therefore distort the cost of capital and lead to business decisions that would otherwise be idiotic waste and malinvestment. This is an issue that is already playing out with low interest rates – such as share buybacks funded with borrowed money – and it gets a lot worse with negative interest rates.

The Fed is the guardian of the banks and has been created for the banks. The 12 regional Federal Reserve Banks are owned by the financial institutions in their respective districts. And a monetary policy that is damaging to the banks, undermines the banking system, and puts bank shareholders at risk of massive losses is just basic anathema to the Fed. Powell wasn’t the first one to just say no to NIPP, but he said clearly.

The 10-year Treasury yield rips. Unstoppable negative yields become stoppable. Read…  THE WOLF STREET REPORT: Snapback Bloodletting in the Overripe Bond Market

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  117 comments for “Fed’s Powell: No Negative Interest Rates at Next Crisis

  1. raxadian says:

    As long as the mighty dollar is the world currency, there is no need for the USA to use negative rates.

    And since no negative rates are assured ATM, even more people will run to the dollar to escape the Euro zone negative yields.

    • 2banana says:

      If there was another currency to replace the dollar, it would be shining now.

      Stable, backed by something, positive interest rates on the sovereign bonds, fully exchangeable, no currency controls, etc.

      Absolutely nothing out there. The Swiss Franc was once fairly close, but way, way too small in terms total currency in circulation. And even the SF is garbage now.

      • Jack the ripper says:

        I respectfully beg to differ .
        The IMF has a wonderful currency called SDR it will be the new and improved world reserve currency probably backed by gold which explains why Russia ,China ,Poland Hungary etc……..are buying gold as reserves
        Also it could be crypto in a cashless setup (u will need to own a cellphone to make cashless payments) if you don’t think so .I will provide you with evidence from a central bankers saying it

        • Vespa P200E says:

          Evel IMF is planning a “new and improved” world currency? I think this was prophesized in the Book of Revelation 2,000 yrs ago along with needing # on your body part in order to buy and sell?

        • Petunia says:

          From my understanding, the SDR is not backed by gold but the fund will accept gold as one of the currencies that can be converted to an SDR.

        • sunny129 says:

          Will the BANKS (of 12 regions) willing to give away the control of Dollar currency to a foreign source like IMF, via SDR? Why would they?

          Very much doubt about it! The level of distrust of internationals organizations (especially financial ones!) in USA runs deep. Beside IMF and World Bank are highly influenced by USA, for decades!

        • Re: Sunny; the float of SDR will ride on top of the sovereign currencies, not in lieu of as is sometimes thought, with the potential to kick the largest can down the longest road, ever. Petunia; Gold reserves determine a nations ratio of SDRs, which is why China has been adding to theirs. Vespa; Current IMF head is American, David Lipton, appointed by 44, until 2022, but nothing will happen until current miscreant is thrown into the Lake of Fire.

        • Petunia says:


          The SDR ratio is predetermined by the IMF and has nothing to do with how much gold the countries hold. There are countries with a lot of gold not in the ratio.

        • Wisdom Seeker says:

          @jack – LOL.

          According to the IMF itself, the SDR is just a basket of everyone else’s trash currencies, not anything new and improved.

          The current SDR is 41.73% US Dollars, 30.93% Euros, 10.92% Chinese Yuan, 8.33% Japanese Yen, 8.09% UK Pounds and so on.

          Mark Carney’s proposal was just talking his book, which is to try to become head of the IMF.

          Any real change would have to be approved by those major nations, who are not going to give up the flexibility their currencies provide, especially after watching the disaster of the Euro.

    • Or less negative rates. Powell is a relativist, he will backpedal.

      • Petunia says:

        I’m not so sure they won’t go negative as well. I hope they don’t because it is a public admission the banking system is broke and the profits are being taken out of depositor accounts.

      • KFritz says:

        A guess: Powell didn’t want to lower rates, but he and the board are lowering them enough to keep the bully-in-chief/dictator-in-waiting at something like arm’s length. The Fed Chief is staying as close to intelligent policy as he can while mollifying DT. Probably an intelligent strategy. Let’s all wish him luck.

        • backwardsevolution says:

          KFritz – The Fed Chief(s) haven’t had anything intelligent to say since the 80’s, ever since that ridiculous Greenspan entered the picture and the clueless Bernanke and Yellen followed. Trump is just pointing out the game. If Powell wants to get angry at anyone, he needs to look at his predecessors who put him in such a predicament.

        • KFritz says:

          Yeah. Powell should be angry at Bernanke and Yellen, and especially at Greenspan–for creating the environment that allowed a demagogue like DT to be Prez. But none of them are incoherent bullies doing anything and everything (like calling for negative interest rates) to stay in office past 2020 to keep himself and his family out of the hoosegow. So please, don’t use any Straw Men (or women) to deflect attention away from the monstrosity in the Big House. That’s too close to Right Wing Astroturfing!

        • Robert says:

          Whenever you hear “The Fed,” or any of the central banks, think “The banks that own the Fed,” etc. Because negative rates are a banker’s wet-dream-come-true, as Petunia pointed out: YOU paying THEM interest on your savings. Powell pussyfoots- the U.S. banks would love to go negative too.
          Nor do they care about excess money printing. To the extent that the 23 trillion national debt can be expanded, they get to collect virtually free funds to gamble with- and the taxpayer is on the hook no less than when Lehman’s going bust triggered the last panic/TARP/QE. How does Central Bank A really know how many rubles, lira, yen or yuan Central bank B is surreptitiously cranking out? Now the rational for the gold standard- any standard!- becomes crystal clear. But that is like the silver cross to the banking Dracula.

        • Wolf Richter says:


          “Because negative rates are a banker’s wet-dream-come-true….”

          No. On the contrary. Long-term, negative interest rates kill banks. They destroy the banks’ core business model, which is profiting from the spread between the interest banks pay for funding (deposits, bonds, etc.) and the interest banks charge on its loans. That spread shrinks to near nothing in NIRP economies.

          All banks in the Eurozone and Switzerland and in Japan have been screaming about this. The Swiss National Bank and the ECB have acknowledged that by promising relief to bank (via exemptions of the negative rates). The Bank of Japan is looking at it.

          Bank stocks in Japan and in Europe have gotten totally crushed and are back where they’d been in the 1980s and 1990s.

      • Washington says:

        The Real-Estate-Developer-in-Chief would of course love negative interest rates. Real estate developers think that they shouldn’t even have to fill out an application, just their signature should be enough, and they’d love the idea of the bank paying them to take on a construction loan.

    • Vespa P200E says:

      Good points raxadian, if anything more foreign money will be chasing USD and chasing safe yield buying treasuries as doubt US interest rate will dip below zero. I think it’s the Japanese who went ZIRP route 1st out of complete desperation.

      • sunny129 says:

        Why would it have to zero? They can create more digital dollars out of thin air and satisfied the demand to infinity.

        They have been doing it for decades if not, aggressively since 2000!
        Of course the purchasing power of the $ will keep going down! Like 13 cents or lower of the value of 1913 dollar!?

    • Old-school says:

      I am not so sure that QE is not the rough equivalent of negative interest rates anyway. If rates are zero, then QE inflates the value of all other assets.
      Unless you have the patience of Job it’s hard to hold zero CD when stocks, bonds and housing doubles.

      Read a great article by Chris Whalen who really seems to knowing banking. He said the Fed has a lot of objectives, but the top priority is the Federal government get funded.

      Also read an article about Fanny and Freddy having no capacity for handling any kind of downturn in housing. I think Fed’s decided to go all in with the Fed reserve and US govt balance sheet to jump start after 2009 and if we have another 2009 it is really going to be a disaster with Fed just having to monetize a 2 trillion deficit with more QE.

      • Vespa P200E says:

        I abhor the thought of another global bailout by the Fed as don’t think QEs/ZIRPs will do the trick this time.

        Expect to be outside US though like the collapse of dead man walking Deutsche Bank as LTCM crisis from 1998 was just a warm-up to 2008. Fast forward 11 years and guess we are due to bigger blow-up than Bear Stearn/Lehman/AIG triggered by subprime loans/CDO this time by QE to eternities and unimaginable every spiraling debt.

      • sunny129 says:

        RE: Fanny and Freddy:

        “I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,”

        Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, told the committee.

        Thanks to a directive from Congress, both Fannie Mae and Freddie Mac are allowed to keep a total of $6 billion ($3 billion each) as a capital buffer. But they own or guarantee almost $5 trillion in mortgage securities.

        That’s why Calabria is losing sleep at night. Two entities that control half of the mortgage-backed securities in the U.S. are effectively one thousand times over-leveraged.

        h/t ZeroHedge 9/18/’19

        • sunny129 says:

          addendum to the above

          To put that in perspective, if just 0.12% of Fannie and Freddie’s mortgages go bad (about one-tenth of 1%), it would wipe them out completely. They’d have no capital left. And without a government bailout, they might cease to exist altogether.

  2. nostradamus jr says:

    In a prior recent post, I brought up the concept of hoarding, and a blurb from the folks @ the Fed (what-does-money-velocity-tell-us-about-low-inflation-in-the-us (2014)] ” … This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.”

    In a different paper from 2014, people @ Fed produced additional thoughts on velocity, in: Money and Velocity During Financial Crises: From the Great Depression to the Great Recession (December 2014)

    “Preliminary simulations of our model suggest that the combination of an increasing equilibrium level of velocity and M2 growth of 6-7 percent per year is not consistent with inflation near 2% per year. As a result, policymakers face the challenge of moderating M2 growth to a pace consistent with the FOMC’s inflation objective—even while velocity increases toward a new equilibrium. Since the Federal Reserve began tapering purchases of long-term Treasuries and MBS, M2 growth in fact, has decelerated.”

    The above stuff links to another recent paper suggesting that QE cash was basically hoarded by banks and essentially added to the current low-rate environment and all this chatter about ZIRP and negative rates.

    So, in a grand macro theory, where we add-in hoarding into the concept of continued Real private residential fixed investment declines, there is a chance that as fewer people invest in real assets, while they hoard money, they have created a virtual economy that is becoming increasingly fragile — and they have created a catch-22 where investing in long term real things has become too risky and thus, it’s easier to invest in short-term virtual synthetic derivatives and to hedge bets on products that don’t exist … it’s all pretty funny and may also explain the recent IOER chaos and the likelyhood that we are trapped in a system that makes no sense. If anything, The House of Cards doesn’t have a solid foundation, which is why the idea of building a basement with negative rates is so appealing!

    M2 Velocity as an annual %

    • mike says:

      I agree. Moreover, I am surprised that many people still believe in the “Federal” Reserve’s allegedly good intentions. While negative interest rates, of course, have negative effects, I opine that harm to the banks for whose benefit the “Federal” Reserve actually acts is the chief damage that the “Fed” is seeking to avoid.

      As to the possible “large-scale asset purchases and forward guidance,” I predict that they will be purchases of bad or over valued assets from the banks. I think it is geared to accomplish the transfer of as much of the US tax payers’ wealth to the banksters as possible.

      Amid the confusing financial terms, the key point to remember is that the “Federal” Reserve has managed to transfer billions to its banks (including the dominant, bankster-controlled, largest banks, which were insolvent after the 2008 crisis) using the financial power and financial credit of the US. It is as if your cousin took your credit card, went on a shopping spree and ran up lots of debts, which you had to deal with. The US tax payer is left with the financial mess: bankrupt pension plans and lost savings due to the ultra low interest rates kept and charged to insolvent banks for years.

      • JZ says:

        Speak of trust. If some one tells you a theory, should you believe it? For science and engineering, you don’t. You go in the lab and test it. Dealing with humans, you don’t trust either. Since you can NOT verify in lab, you make sure you either have a reward for him if the theory is correct or you have a punishment if the theory is wrong. For Powell, the FED and their theories, they do NOT get rewarded if the theory is correct and they do NOT get punished if their theory is wrong. So there is zero trust from my side on any of their theories. They can sweet talk to the public all they want and all traders on cares about one thing, what are they buying, F the theory.

  3. Rinaldo says:

    They will to have to solve the offshore $ funding shortage and the EU’s collateral shortage, i.e. EU will have to produce bigger fiscal deficits. Prepare for high inflation.

  4. MCH says:

    I think we should thank Jerome for standing up to the idea of NIRP. It’s too bad that it took him two rate cuts to get up the courage to stop.

    Don’t let captain Cheetos persuade you otherwise.

    • No says:

      To the author: Who exactly is disappointed by this “untimely” end to the “negative interest rate” era?

      • Wolf Richter says:

        “The author” thought he was being funny here :-]

        • c smith says:

          So basically you’re saying when the Fed must choose between destroying the banks (via negative rates) or subsidizing the Federal government, the Fed will pick the banks?

        • Wolf Richter says:

          No. I have said no such thing. I don’t even see the connection. I have no idea how you came up with this. That’s a false choice. The Fed can bail out the government just fine by buying Treasuries, even if the federal funds rate is 10% and the 10-year yield is 20%.

        • MCH says:

          Wolf, you are hilarious. Don’t worry. I’m just waiting for Powell to start raising interest rates, but that’ll be the surest signal for Captain Cheetoh to try to fire him. Heck, I think if the orange haired guy gets a second term, he might try to replace Powell anyway.

          Somehow he thinks a race to the bottom is a good idea.

  5. Wendy says:

    If inflation is 3% and your yield is 2%, you already have negative yield. You just don’t realize it until several years later.

    • Jack says:

      Very good point.

      Even a rate of 3% on your investment/s is futile and doesn’t stand up to any proper scrutiny in terms of being a good yield.

      The perception that our house is only half under water as opposed to the neighbor’s house being fully submerged so we’re in a better shape is quite preposterous!

    • Scott says:

      Great point, Wendy. All the time when teaching my high-school economics (personal finance, really) students, it takes me a few times to explain that while the risk-reward pyramid of investments (from Bruno with a gun protecting your safe-box on the bottom, to real estate on the top) is still a valid concept to understand, WHERE inflation is on that pyramid matters too. If your bonds are yielding 1.5% but inflation is at 2%, you are losing money. Less money than you would be with Bruno or a savings account at BofA, but still. Add to that the question of interest rates on loans – if I’m paying 4% on a mortgage, it behooves me to pay off that first.

      The only entities that disagree are the banks…which makes total sense, because banking accounts provide them the capital to loan out, and they hate those of us who pay off our loans early.

      I’m hard-pressed to explain to them where they can actually earn a decent, reliable, moderate-risk return on investment.

      • Wisdom Seeker says:

        @Scott – You know this already but I want to say it since you didn’t –

        There are non-financial investments. Among those, a sensible practical education, first for oneself, then later for one’s children, is by far the best investment young people can make.

        Turning one’s own mind and body into a productive asset comes way ahead of both Bruno and BofA’s offerings on the investment pyramid.

        Next after education might be an investment in reliable and cost-efficient transportation, so that your very own “personal productive asset” can go to work anywhere it likes. Cost-efficiency includes time as well as money.

        I think if the kids do the math they’ll discover that those two investments will have much higher return for them than any of the “adult” investment products.

    • sierra7 says:

      “Trust” me…retirees (and or savers) are very well aware of this…….LOL!
      We’ve been getting royally screwed for years!

  6. Trinacria says:

    The US debt as well as the debt of all the other industrialized countries is keeping and will continue to keep everything down. The industrial world is at the end of a debt super cycle. There will be no daylight until we take the big bath. Monetary stimulus isn’t going to do the job, period! We think the homeless problem is bad now, just wait. I am very concerned for the social unrest that could result. People need to have hope. Gird your loins.

  7. Tony says:

    It is good that there are some still trusting the FED. The rate cut was expected after the bond market demanded it and the markets reaction was timid as it all was priced in. The real action happens in the repo market with EFF decoupling from repo rates. The step from TOMO to QE is gradual, but in the end it is one and the same. As long as primary dealers have too big an inventory of UST, and the treasury relentlessly auctions off more, with foreign CBs not buying anymore, and the dollar still trending up, the FED will have to do its thing. With all this going on already there is no way rates will stay up as the next downturn arrives. Fiscal deficits will expand, if nothing else because tax receipts will decline, and the FED will have no choice but to finance these. Times are over where foreign CBs would sterilize US deficits. If we want the dollar to come down and finance our fiscal deficits, both rate cuts and QE are inevitable.

    • Wolf Richter says:

      Before QE started in 2008, the Fed has always and routinely used repo operations on a daily basis to keep the short-term rates where it wanted them. That was the main way it used to do it.

      Since the beginning of QE, it stopped doing it because it didn’t need to do it anymore. It had other tools, including the IOER. Now those tools alone are not working well anymore. So it’s back to repos, just like before. Repos are not QE. They are short-term trades that unwind after a set time.

      • Scott says:

        Which is part of their normal toolkit, but the TIMING of it, and the fact they didn’t anticipate having to use it, seems to be where the real story is. Right?

      • GP says:

        When the Fed steps in for a repo trade, it completely removes the counterparty risk.

        Borrower had to come to Fed also means the borrower had no other resort but to depend on Fed’s magic money (created out of thin air).

        Hence, IMO, Fed repo trades should command a hefty premium over the target rate.

        • GP says:

          When we run out of cash and can’t borrow from friends & family, we go to payday loans and pay insane interest rate. We don’t get 5% loans there.

          Banks shouldn’t be rewarded with cheap rates for their miscalculations either.

  8. MC01 says:

    Does anyone really believe these folks anymore? Or to be more precise: has the US Federal Reserve got any shred of credibility left after slashing rates twice in less than four months for no other reason than the temper tantrums of a public opinion that clearly lost its mind long ago? These people are supposed to be leaders and to shape monetary policies according to their own mandate, not to follow what two-bit financial dirtsheets write.

    If the public opinion demands negative rates, they will get negative rates, that’s as simple as that. If the original rationale behind these accursed financial instrument was currency manipulation it has since failed: after having to abandon the untenable 1.20 peg to the euro the Banque Nationale Suisse has constantly failed in their attempts to demolish the Swiss franc relative to the euro. The Bank of Japan hasn’t been much more successful in attempting to devalue the yen relative to the US dollar. But it doesn’t matter: people these days believe the chief problem we face is that companies and governments cannot access credit at “equitable rates” or that we are “hoarding money” under the mattress or whatever the latest fashionable economic idiocy is.
    Nothing new under the Sun: people believed in Maoist economics for decades, as they believed in Soviet economic propaganda in the 80’s.

    • Xabier says:

      They also believed, or pretended to believe, the diagnoses made by Soviet psychiatrists……

      A mad world, my masters, can go on for longer than a sane man might dare to fear.

    • Wisdom Seeker says:

      @MC01 – Unless you have telepathic capabilities, you don’t really know why the Fed lowered rates slightly. You only know what you saw and heard, and we already know not to trust the financial media. We live in Plato’s Cave, now more than ever.

      BTW, the most significant thing the Fed did was to stop QT early. My guess is the rate tweaks were smoke-and-mirrors to deflect attention from the real change.

  9. Frederick says:

    The FED never lies about anything do they? Remember Bernanke in 2007 saying how there will be no housing crisis as everything was super and contained How’d that work out for ya?

  10. Rat Fink says:

    Powell does not support NIRP …. now.

    Wait until he gets backed into a corner and feels there is no other alternative.

    His tune will change.

    People have short memories for how many times central banks changed their positions.

    • Lance Manly says:

      The important point that Wolf made is the Fed serves the banks. NIRP destroys the business model of banks, so they are not going to do it.

      • rhodium says:

        Why are they doing it everywhere else then? You may be right, I don’t know, but having higher rates, even if they are zero will still cause currency valuation issues. The people who have been predicting years ago that this will all end in an escalating currency war appear more correct every day. If the Fed doesn’t actually nirp the economy I think that only means it will attempt to compensate by doing qe like programs to a far larger extent. No nirp ultimately means a far far larger monetary base and also quite possibly far larger government deficits. All that debt out there either needs to be rolled over or diluted after all.

        • Scott says:

          If I’m understanding Wolf’s points (and others who speak on it), it’s mostly because our central bank was created differently, and with a different mandate, than many others. The ECB, for instance, cares more about keeping the EU together than saving the profit margins of EU banks. The PBC is just an arm of the communist party, and thus serves its long-term interests. The Fed was created to protect the interests of the banks, not the government nor the polity. I might be wrong there, but that might be why.

  11. jest says:

    Hahahahaha…Powell did not respond with his usual, “we will act as appropriate.” He had a real answer.
    I Like that!

  12. Tk says:

    Negative interest rates only means that one must pay to store money as it should be. It only means that the fractional reserve is not inflating. It is only bad for over bloated government and zombie companies who need new money to keep afloat. The European countries must cut the socialist welfare policies or dissolve. Of course doing so would be great for small business.

    • Robert says:

      They’re not storing anything but digits, which is why on line banking is such a threat to brick and mortar banks- they can use the savings to offer a more competitive rate.
      Banking had its roots in the goldsmith charging customers to keep their gold safe in his vaults- which makes perfect sense. But the Banker’s Original Sin was fractional reserve banking: they issued more receipts than they actually had for stored gold, and what is going on today defies belief. Utter mayhem.

  13. Otishertz says:

    The Fed has reaffirmed it will keep buying everything it needs to buy in order to keep policy in line.

    They will have “injected” $200 Billion dollars in three days as of this morning’s coming repo “operation.”

    • AlamedaRenter says:

      I’d really appreciate a brief primer on wtf this overnight repo madness is all about.

      I’m not finance guy, so it’s over my head…but it can’t be good to essentially be bailing out hedge funds every night with tens of billions of dollars.

      • The Fed is throwing billions at the REPO market to keep Fed Funds Rate from their UPPER range limit, while they were cutting rates at the same time. At one point the overnight rate was 8%. Jerome’s head should be ready to explode. The market loves this of course. They borrow short term and reinvest that money into stocks so plenty of taxpayer dollars to support a rate cut which funds more buybacks and speculation is well received. The official reason for the credit lockup was short term borrowing issues, relating to the dollar, which is base currency for EM bond issues. You just shove money at the problem to pay for your rate cuts? I call that NIRP

    • Wolf Richter says:


      Before 2008, repos were how the Fed kept short-term rates on target. It did repos on a near daily basis. Now it’s using the same tool because IOER no longer suffices in keeping its rates in check. Repos unwind after the set term.

  14. David Hall says:

    Gold mining stock investors have been enjoying positive gold investor sentiment. Not all gold mines are profitable. Naive investors sometimes bought the empty shaft.

    US S&P 500 corporate earnings growth was negative in Q1, then slightly positive in Q2. Q3 estimates are negative, but companies frequently beat estimates.

    People liked to refinance their mortgages as rates dropped. The interest payment to disposable income ratio dropped.

  15. Normansdog says:

    Is it not the case that the sole aim of QE was to recapitalise the banks? Give the banks oodles if cash for free and then let them deposit it at the fed at 2% – basically just giving the banks billions of dollars for nothing. It is really no surprise that the banks live this and the FED doesn’t want to stop doing it. Unfortunately this has zero benefits for the real economy and the US economy is living on massive levels of Personal debt which will not stand higher interest rates. The FED is stuck just as is the ECB and BoJ.

  16. Steve finney says:

    I don’t have much faith in the planned voyages of boats that constantly need bailing out.

  17. timbers says:

    “However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot…”

    While this may be true, negative rates in Europe have been a catastrophe disaster.

    And that is not even a close call. It’s true by light years of miles.

    By keeping Europe “glued together” IMO the economies of Greece and Italy – and other nations nations – have performed vastly worse. In the case of Greece, keeping Europe “glued together” caused bone crushing austerity and has literally killed people.

    This devastating economic catastrophic disaster happened because – and only because – of the EU union and keeping Europe “glued together” via the EU Eurocrats can deny Greece or anyone who defies their dictatorship, it’s currency with the full intention of killing Greek people and others if it comes to that, until Greece adopted the EU’s proven failed austerity program, an austerity program that exactly caused is current disasterious economy.

  18. “After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. Those were the two unconventional monetary policy tools that we used extensively. We feel that they worked fairly well.”

    Layman’s Terms Translation: After we finished bailing out our most important Wall Street constituents, we decided to shower them with even more money so they could throw a party. It was a really nice party.

  19. A. Lurker says:

    If the US had negative interest rates, could it continue to have deficits with rest of the world?

    Isn’t a positive interest rate needed to make US debt attractive to surplus countries (china, Japan and Europe) so that it can soak their USDs and avoid US inflation?

  20. Wander Lust says:

    I love it when these guys give their version of famous last words…..

    “This is far and away the strongest global economy I’ve seen in my business lifetime.” Hank Paulson July 12, 2007

    It is almost like you can set an egg timer based on how definitive they are with their statements. I guess I’ll wait for Powell to use some version of Juncker’s “When it becomes serious, you have to lie”.

  21. annette says:

    In my long life experience, when bureaucrats, politicians and the like deny something, it means they are lying.

    • Scott says:

      I believe it was Shakesepeare who wrote: “Thou doth protest too much.” Apparently what you elucidate has been true throughout time…

      • Xabier says:

        On the whole, I trust to Shakespeare, rather than Jesus, as the latter’s sayings are only second-hand…..

        Shakespeare is a mirror to the world.

  22. QQQBall says:

    On one hand, neg IRs would be a panacea for the USG. That would help the debt crisis. OTOH, its hard to tax cashflow from neg IRs, so the USG would have to expand other taxes and create new ones such as wealth tax, SM transaction tax, etc. With neg real interest rates, likely higher taxes and new taxes, it is unlikely that after-tax real yields will increase for most Merikens.

    Powell like The Bernank is just reacting. TARP’s $750 B giveaway was supposed to solved this over a decade ago.

  23. economicminor says:

    If we have such a great economy, why cut rates at all?

    • Sammy D. says:

      People are so ignorant because where I live in Canada a Toronto home price has gone from around $175,000 in 1995 to $800,000 in 2019. Canadians think they are winning by paying a 2.4% to 2.5% mortgage rate 5 years fixed but in reality they have just been snookered as they paid $625,000 in prepaid interest because they would not of overpaid this if interest rates were normal at 6% to 8% mortgage rates.

      They don’t understand that the low rate and low interest rates makes everything from housing to rent much more expensive. They just look at the monthly payment and not the total cost.

    • Paulo says:

      Hey, Economic mirror, that was my comment you just posted. :-)

      Excellent article and very very informative comments.

      I often have this discussion with my US situated sister. She’ll talk about how great the economy is below 49 compared to everywhere else and I always ask if it’s so great, then why does every household need two full-time wage earners just to get by? How was it that our Dad owned a brand new house when he only worked part-time and mortgage interest rates were 7%….oh, and my mom stayed home. I had a friend who’s Dad worked as an appliance floor manager at a local department store and they owned a home, drove a car, and did it on the one wage. That was in the late ’60s.

      neg rates? It might help with that new gizmo phone purchase, and pay for all those hedonistic ‘adjustments’ everyone just has to have and buy on credit.

      And that’s the problem. Debt; consumer debt, Govt. debt, and corporate debt. Debt, the natural result of a consumer driven economy, where strong numbers means buying stuff instead of making stuff to sell.

      Beware of that strong dollar. In a World of no parity others will no longer be able to afford to buy your products and services. They will have to stay home and not visit. Companies that make things will have to finance buyers and provide ‘incentives’, even weapon manufacturers. In a stilted World there will be an increase in violence as inequality begats resentment, terrorism, and eventually war. Sound familiar?

      • BenX says:

        Debt is a constant drag on the economy. It’s funny how debt is spun to mean something else, like: “The healthy uptick in credit levels can reflect upbeat outlooks for the economy and for consumer spending”.

        Is that what an uptick in debt means? Or is the uptick due to a stressed consumer, living paycheck to paycheck, trying to maintain their standard of living?

  24. unit472 says:

    Being retired with what was once a decent nest egg before “financial repression’ morphed into ‘unconventional monetary policy” Powell’s unwarranted rate cuts are really nothing more than stealing from my bank account so Microsoft can buy back $40 billion more of its shares and make Bill Gates even richer.

    As a consequence I have reluctantly come to back Elizabeth Warren’s call for a 2% wealth tax on those with $50 million or more in assets. What Powell giveth, let the Congress take away. Powell doesn’t see any problem dipping into my modest retirement funds so let Warren steal from his.

    • Paulo says:

      Except Unit 472, the Wealthy will still be able to hire experts and finagle numbers to prove they are not wealthy. Or, hide their money, relocate it, or even move away. Tony Soprano used to hide his extra cash in the pool heater and had a pretend job for tax filing purposes. The Oxycontin kings just got caught shipping billions out to Switzerland. It’ll take roving squads of kidnappers to bring it back if the pols actually turn on their masters, which has never happened before as far as I know.

      A female Texan resident is currently in jail for 5 years for voting illegally. Felicity Huffman just got sentenced to two weeks and a 30K fine for her college admissions scandal role. Money appears to always win.

      • Bobber says:

        No, the IRS is good at tracking ownership of things, especially bank and investment accounts. ThIngs have changed a lot the last few years.

        I hate it when people feel the need to accept things as is, as if everybody is a useless pawn. Act like a pawn, and you will be one.

    • IdahoPotato says:

      Please explain how her record as a regulator was terrible. I have posted info before about what the CFPB has managed to do since 2010.


      Repeating untrue platitudes ad nauseum doesn’t make them true. Also, please tell me what your chosen candidates have proposed or achieved. Thank you in advance.

  25. Augusto says:

    I’m not buying it. If the markets and the big money players really want it, they’ll get it. In 2008-09 how many millions of Americans lost their jobs, their homes, their business so the Fed could save the banks and their bonus pool? Low interest rates are used every day by the banks to fleck a little bit more and a little bit more off savers. Negative interest rates in a second if they howl “the end is nigh”. When the eventual reset comes, debt monetization et al, well we all know who will be the big winners, and it won’t be the people.

    • Wolf Richter says:


      If “… the big money players really want it…” The biggest money players are the banks, and the banks HATE negative interest rates because they cut into their core profits. Over a short period, banks can deal with it. But over a longer period, it can kill banks. Banks are now complaining loudly and publicly all over Europe about it.

      And the Fed serves the banks.

      • JustJon says:

        Wolf: If the Fed serves the banks, why would they do something that hurts the banks in the first place? Because they believe the alternative would hurt the banks more? Or are the banks not their main concern? Some other reason?

  26. Lou Mannheim says:

    When they write the book on this experiment in political economy, I wonder if the conclusion might be: “It was a good effort, but ultimately it failed due to an over-reliance on monetary policy and an inability to comprehend that 1+1 does not equal 3.”

    • IdahoPotato says:

      Wolf, I enjoy your insights, but your comments form has been taken over by partisan trolls. I guess that is the price of popularity.

  27. Tom Pfotzer says:

    It seems that banks can still be profitable even if the Fed lowers its rates. The banks can, and do, charge a “spread” between their cost of funds and the interest rate they charge their customers. That’s why credit card companies charge 20+ percent on unpaid balances, while your bank might pay you 1.25 percent on your deposits.

    I did a quick literature scan, and noted that Bank Of America’s profitability over this past few quarters is still pretty healthy. The banks are making money.

    The main rationale for Negative Interest Rate Policy is (surprise) to goose aggregate demand. To get people to spend money they’re currently saving. It’s just the next, normal, perfectly appropriate step from lowering interest rates, then zero interest rates, now negative interest rates.

    Fed says “we’ll do QE instead”. OK, fine. That’ll lower and flatten the yield curve (price of borrowing money across all durations). That’ll stimulate borrowing and investing.

    Except it doesn’t seem to, actually. Don’t you think Japan and Europe tried that first? Why would they do NIRP if just lowering rates would have worked?

    There is an economic war going on. The big econ blocks are fighting for market share (who makes the stuff that everyone else buys), and the tools of that war are low cost of money, a weak currency (stim to exports), and low wages (while keeping production quality high).

    China has all three major weapons, so it’s currently winning the game. The other players are just trying to hold on to what market share they have, hence all the central bank machinations.

    The Fed, and its owner-banks fail if America Inc. fails. Believe it or not, they understand that very well. That was the major under-the-radar rationale for the bailouts: banks fail, America Inc. fails.

    So, if the banks have to take a profits haircut, they’ll do it. Deals will get made (credit card fees allowed to rise, interest on reserves paid, etc.)

    Same with pensions, savings & the kitchen-sink. This is econ war, all players are expected to suffer pain during warfare. When you lose market share, it’s very tough to claw it back.

    What keeps me wondering is how automation is affecting the rules of the game. Automation means value of labor falls, and with it the purchasing power of the masses. No money in workers’ pockets means declining velocity of money, ergo depression. Velocity of money is hovering near all-time lows, and all the King’s Men can’t raise it back up.

    • unit472 says:

      I await the coming of an economic Einstein to give us a comprehensive theory to explain why everything broke with the collapse of Lehman Bros.

      Is there an economic ‘Theory of Relativety’ where there are absolute limits to what financial engineering can achieve in a world of finite resources. Just as it requires more and more energy to approach the speed of light until the energy requirements approach infinity so to it would appear that Central Banks will have to engage in infinite QE just to keep their system going.

  28. Gershom says:

    Um, yeah…”Powell said.”

    Bernanke swore under oath that the Fed would not monetize debt. He lied, too.

    • Mr. Knoss says:

      Good point.

      And with Powell, mid-cycle adjustment just became mid-cycle-adjustments.

      Mid-cycle? So he’s predicting that the cycle ends in 2030, right…

  29. Winston says:

    Ah, yes, central banks BUYING ASSETS, artificially propping up prices and saving concerns that deserve to fail, thereby central planning winners and losers rather than letting the essential Darwinian effect which makes capitalism work do its job. Next year, Japan’s central banks will become that country’s largest stock holder.

    We’re doomed… Seriously.

    • Escierto says:

      What happens when the central bank basically owns the whole stock market? Why can’t it just keep bidding the price up and up and up? We are all Japan now and in time, we may all become Zimbabwe.

    • BenX says:

      The Bank of Japan was nationalized in 1998. So the Japanese equity market is on track to be owned by the Japanese government, effectively nationalizing not just the BOJ but the entire Japanese market.

      And the Federal Reserve Bank is on track to follow the footsteps of the BOJ.

      This is the same thing that happens when someone wins in Monopoly but doesn’t want to stop playing.

    • MC01 says:

      Private James Frazer, is that you? ;-)

    • Group Ranger says:

      The Fed didn’t buy anything like equities during GR, they buy gov debt instruments, but then again, there is Maiden Lane, which remains a joke. The CB’s are unlikely to ever deal with actual shares of corporations.

  30. Petunia says:

    My understanding of what’s going on with the fed opening up the kimono is that they want to make sure banks who need reserves get them. There might be some party out there nobody wants to lend to, even on an overnight basis, because they might not be there the next day.

    The fed is actually doing its job by pumping liquidity into the system. Who might be the next Bear Stearns is the question no one will answer.

    • GP says:

      Wild guess here – the oil spike caused a bank (or 2) to violently close down positions and be very short on cash.

      Wouldn’t we love to know who have been borrowing heavily and consistently in the repo market? Fed has been keeping that a secret.

      Real possibility one of these weekends we hear about a bank closure.

      • Petunia says:

        There are so many possibilities it’s hard to choose.

      • Wisdom Seeker says:

        No one’s worrying about US bank closures that would be worthy of $75B in Repo. Just watch the stock charts. Even DB, one of Wolf’s favorite punching bags, is holding steady for a change.

        Now, a Chinese bank or two, or like you say, something connected to the Saudi refinery attack, I could believe that. But not within the US, the stock charts would know.

  31. HollywoodDog says:

    Powell is the 8th Federal Reserve Chair I’ve had to live with. I don’t remember anything about Martin, Burns, or Miller. I remember Volcker actually did his job. Greenspan set us up for the Financial Crisis, while telling us not to worry about the “froth”; he thought Atlas Shrugged was non-fiction. Bernanke had to clean up the mess. Yellen didn’t know when to put the mop away. Now here we are at Powell…

  32. Boldej says:

    The author is likely a wishful thinker who most probably is hoping to someday recoup all the money he’s lost shorting the bond market. He seems to be ignoring the fact that Fed chairmen have a long history of saying one thing and then later doing another. Negative rates are coming soon to a bond market near you. ” If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said. ” Alan Greenspan

    • Wolf Richter says:


      Almost everything you said in this comment about me is nonsense. So why would anything you say about the Fed be suddenly not nonsense?

      So let me remind you: the Fed did NOT institute negative rates during the Financial Crisis, and is pretty happy with how it solved the issue with QE and 0%. The Financial Crisis was by far the largest economic and financial crisis in my lifetime. A regular recession is mild — and the Fed knows the difference between a regular recession and when the banking system is collapsing and 12 million Americans lose their jobs.

      • Rat Fink says:

        But none of the central banks implemented NIRP when GFC hit.

        Now we are getting to the nitty gritty. ‘Whatever it takes’ means exactly that.

        When the US starts its death spiral, I expect the Fed to do exactly what the ECB is doing – NIRP.

        ‘and is pretty happy with how it solved the issue with QE and 0%’


        How about put off the day of reckoning.

        All the CBs have done is interrupt the collapse of the global economy and inflated the bubbles across all asset classes to monstrous levels.

        Nothing is fixed. Nothing is better. What we have is 2007 on steroids.

      • wkevinw says:

        Correct about the Fed (and many financial “experts). They think they did a great job with the 2008 recession. I wish they understood better the “moral hazard”/”creative destruction” better. They should have done things like the FDIC plan and maybe the GM plan: order bankruptcy (along with firing all execs and the boards). I know this isn’t perfect, but it sure incentivizes future execs and board members not to be stupid, greedy, dishonest, etc.

        I think Japan thinks they have done a great job too, but I guess Wolf and I agree: Japan doesn’t look that great.

        Thanks (!) for the part about the Euro and NIRP keeping the Eurozone together. That explains a lot, and why the US “doesn’t need NIRP”.

  33. Michael Engel says:

    When the Fed raise rates x2 times in 6M fundamentals
    are bad.
    JP raised x4 times in 11M.
    When the Fed cut twice in 4M, they will cut again.

  34. WSKJ says:

    IMHO, Fed Chairman Powell gets some credit for his statement against negative interest rates. His statement came out against the current backdrop of many pundits expressing the opinion that we the U.S. must go along with NIRPs at the ECB and most of the rest of the developed world. I have heard this opinion commonly expressed recently (wonder who is driving this: clearly those who see how they can profit from NIRPs).

    So Powell gets some credit. My impression is that 3% is the minimum interest rate that encourages saving and staying out of debt, but that’s another discussion.

    And oh yes, of course you get credit too, for covering this story, Wolf.
    Thx again.

    • Weary Patience says:

      A minimum of 50% higher than target inflation (2%) sounds good to me – would about cover the tax burden of “gains” leaving you break-even vs. losing $$$ every year guaranteed.

  35. tommy runner says:

    maybe wall st and their speculators got a tax cut instead of neg rates, now caught far from home, in bad partnerships and employing the wrong (non) voters they are going to have to hike out. they can discuss any uncertainty about trade policy they may think/wish existed.. along the way. jp defends inflation to avoid low/neg rates. the eu is a spectator.
    slow global growth, mfg, biz investment, trade vs us consumer.. we’ll see.

  36. c smith says:

    Doesn’t the prospect of, if not actual, large scale asset purchases effectively CREATE negative interest rates? It sounds like Powell is talking out of both sides of his mouth (again), as is the fine tradition of Fed presidents.

    • Wolf Richter says:

      c smith

      Powell is talking about central bank policy. The Fed targets the federal funds rate, which is the super-short-term overnight rate. What he said is that the Fed will not push the federal funds rate into the negative.

      QE impacts yields with longer maturities. So in theory, with an inverted yield curve, you could have a positive 1-month yield, in line with the federal funds rate, and a negative long-term yield, if the market decides to go that route. But this hasn’t happened anywhere that I know of. Consistent negative yields only have come about when a central bank lowers its policy rate into the negative and applies QE.

  37. Kerry says:

    QE is coming. It is inevitable…

  38. Michael Gorback says:

    In other news, today Jerome Powell stated during an interview, “Flip, no I meant flop, no it really was flip”.

    Chinese officials then declared a 100% tariff on flip-flops, stating that the Fed was manipulating the price of flip-flops, a major source of income for the PRC.

    The National Association for the Prevention of Athlete’s Foot released a statement that “International trade wars over flip-flops will endanger the health and well-being of people who shower in gyms.”

    Kamala Harris weighed in stating “This is the ultimate proof that Trump is a racist.”

    The American Federation of Flip-flops Manufacturers accused Harris of “playing the race card” and asked President Trump to place a 500% tariff on Chinese flip-flops.

    Beto O’Rourke added flip-flops to his list of things to confiscate until a video was discovered on YouTube that showed him opposing flip-flop confiscation.

    Attorney General William Barr then opened an investigation into Beto’s possible involvement in flip-flops.

    • sierra7 says:

      M. Gorback:
      Reminds me of the line in Dr. Strangelove which I will alter here:
      “Mr. President, we have a ‘flip-flop’ gap!”

      Have to thank W. R. for again writing a very interesting article which has led to very provocative comments. As a very old timer retiree I take no brook with NIRP. In my world past business it makes (made) no sense.
      And, all the rhetoric across the MSM about how good the economy is doing the basic “Q” has to be: Why cut interest rates?
      “Trust”? What’s that????????
      That’s what we did have way, way back in the late 1940’s thru probably the ’60’s………..Now it’s just a dirty word!
      “What Fools these Mortals Be!” (William Randolph Hearst Sunday Comics section sub-header SF Examiner way, way back)

  39. Gone with The Wind says:

    If the Fed knew what they were doing, negative rates could be used in some clever way to make a profit, in the long run, but instead, we’ll probably get lots of creative deals with toxic waste and hidden agendas that get flushed away while everyone is sleeping … I really trust Powell, almost as much as Ben:

    A spokeswoman for the Fed declined to comment on the disposal of toxic real-estate loans by Maiden Lane LLC, the Fed-controlled company that was established in 2008 to handle all of the Bear Stearns assets taken over by the Fed.

    In the case of Eleven80, taxpayers didn’t make out well. Bear Stearns originally made a $54 million loan on the project, which Maiden Lane inherited. In the recent deal, Maiden Lane sold the debt for $35 million to KBS Strategic Opportunity REIT, a nontraded real-estate investment trust managed by KBS Capital Advisors LLC, of Newport Beach, Calif.

    The Fed also moved slowly. A trustee began foreclosure proceedings in 2009, but three years later Cogswell still owns the asset. The foreclosure has been complicated in part by litigation related to a construction company seeking payments.


  40. Graham Aston says:

    Most if not all of this is over my head. The problem of negative interest rates is given as they ruin banks, their business model is based on the margin they make borrowing and lending. But why can’t they change their model? Why not add a charge to every monetary transaction by their customers. Of course a cash less system which we seem to be moving to would facilitate this. The problem of miss pricing risk could be simply addressed by only lending to those who have the equity and proven cash flows to service and repay. Where I am the banks are fairly pedantic. Of course there are other problems like the retirement funds etc…. Economics is continually evolving, as the stress increases the evolution has to step up.

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