Fear of “Reversal Rates” Sets in, Says the Fed

The fear that today’s negative or low interest rates render central banks helpless in face of the next economic crisis.

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

There is now a new theory cropping up in Fed-speak and more generally in central-bank speak. It’s not actually a new theory. I have been saying the same thing for years. In fact, it’s not even a theory, but reality. But it’s newly cropping up in reports from the Fed and the ECB. It’s the concept of what is now called “reversal rates.”

It’s an official admission that “reversal rates” exist. The term crops up alongside the fear that countries with negative interest rates are at, or are already beyond, those “reversal rates.”

The idea of interest rate repression is to induce businesses to borrow and invest, and to induce consumers to borrow and spend, and the hope is that all this will crank up the overall economy as measured by GDP.

“Reversal rates” is the term for a situation where interest rates are so low that they’re doing more harm than good to the overall economy, and that lowering rates further will screw up the economy rather than boost it.

Central bank monetary policy, such as cutting interest rates and doing QE, takes wealth and income from one group of people and delivers it to another group of people. This is how monetary policy works. It’s not a secret. In central-bank speak, it’s called the “distributive effects of monetary policy.” The idea is that for the overall economy, this income and wealth transfer from these people over here to those people over there translates into more overall economic activity that adds to GDP.

The problem for central banks arises when too many people and businesses get screwed by these policies and when they alter decision-making in absurd ways – which is what low and negative interest rates do – to where the overall economy actually takes a hit when rates drop further.

This issue of “reversal rates” has cropped up for the first time in the Fed’s Financial Stability Report that it released a couple of days ago.

So now reversal rates are a thing. Suddenly, they’re seen as the second highest risk to the economy, after trade frictions, in the eyes of big economic players that the Fed cited in the report.

In its Financial Stability Report, the Fed says that the risks from, quote, “advanced-economy monetary policy are front and center.”

This “advanced-economy monetary policy” means ultra-low or negative interest rates and QE in effect in the advanced economies.

Given that these policies are still in place after many years, and given that the Fed has just cut rates three times, despite there not being any economic need to do so, there are now fears that the Fed and other central banks would be helpless in countering the next economic crisis.

And I quote from the Fed’s Financial Stability Report:

Many respondents wondered whether central banks would be able to counter an economic slowdown due to already low levels of interest rates and compressed risk premiums.

“Relatedly, some contacts argued that select foreign central banks with negative policy rates were either close to or beyond reversal rates, which are the rates at which the negative effects of incremental easing – for example, weaker profitability of financial institutions or higher precautionary savings from retirees – might offset positive growth impulses.

And the report went on:

With regard to the Federal Reserve specifically, a few contacts highlighted the possibility that U.S. interest rates could turn negative, with potentially severe repercussions for money market funds and the municipal bond market.”

We’ve already seen that negative interest rates are terrible for banks. They destroy the core business model for banks and make future bank collapses more likely because banks cannot build capital to absorb losses.

Banks are a crucial factor in a modern economy. And they’re getting hammered in countries with very low or negative interest rates. Japanese bank stocks are down 90% from the peak 30 years ago, and European bank stocks are down 70% from 12 years ago and are now back where they’d first been in the mid-1990s.

If interest rates go very low or negative, the spread between a bank’s cost of capital and the interest rate it can charge on loans in order to make a profit gets thinner.

But banking risks get larger for two reasons:

One, prices of the assets used as collateral for loans have been inflated by these low interest rates, and when these asset prices deflate, the loans no longer have enough collateral to cover them.

And two, low interest rates drive banks into risky activities to make a profit. For example, they buy collateralized loan obligations backed by corporate junk-rated leveraged loans. As they load up on speculative financial risks, banks get more precarious and unstable. Over a longer period, this equation runs into serious trouble.

The ECB, the Bank of Japan, and the Swiss National Bank have already admitted that negative interest rates weaken banks. And they’re now trying to tweak their policies to “mitigate” the destructive effects of their policies.

In terms of the real economy, low and negative interest rates have a profoundly destructive impact in two ways: They reduce demand by depriving asset holders of income that they would have spent; and they distort the single-most important factor in economic decision making – the pricing of risk.

So how much money are we talking about?

Globally, the mountain of negative yielding debt peaked at $17 trillion with a T at the end of August. As yields have ticked up since then, the mountain is now down to a still mind-bending $12 trillion or so. Debt that has a negative yield is absurd. It turns the whole equation of borrowing and lending upside down.

In the US, there are no negative interest rates. But there is a lot of zero-yielding or ultra-low-yielding debt. One person’s debt is another person’s income producing asset – when interest rates are low, these assets produce little or no income.

In the US in total, there are over $40 trillion with a T in fixed-income financial assets, including Treasury securities, bank savings products such as savings accounts and CDs, investment-grade corporate bonds, municipal bonds, and asset-backed securities. People and businesses that hold these $40 trillion in assets, directly or indirectly, expect to earn income from these investments. And that income has gotten smashed by low interest rates.

A 2% reduction in interest rates on the $40 trillion in assets means a reduction of $800 billion in income per year. This amounts to 3.5% of GDP. $800 billion a year is a lot of money that cannot be spent.

When interest rates come down, these people have less money to spend, and they cut their spending. This includes the many retirees in the US. And it reduces demand. This has been happening in Japan for over 20 years. It’s happening in Europe. And it’s happening in the US.

When central banks, in this environment of already lacking demand, cut interest rates further, they will make the demand problem worse. In other words, these “distributive effects” no longer benefit the overall economy, but hurt it.

This is the point where “reversal rates” set in.

In addition, low interest rates do something else that damages the overall economy: they distort the pricing of risk. Risk is priced via the cost of capital. Normally, investors demand a larger return to compensate them for a higher risk.

But if central banks push interest rates too low, this essential function doesn’t function anymore. While investors and banks are taking more and more risk to make a little return, unprofitable projects get funded cheaply, thus encouraging unprofitable projects, malinvestment, misallocation of capital, and ultimately zombie projects with big losses. It means overproduction and overcapacity. It means asset bubbles that infuse the entire financial system with huge risks.

All of these factors are bad over the longer term for the real economy.

Low interest rates are supposed to support the part of the economy that benefits from debt funding, such as capital-intensive production of durable goods, building factories, and expanding production. Low interest rates also make it cheaper for companies and consumers to borrow in order to buy these goods, and this stimulates demand for these goods.

But those benefits of cutting rates further are minimal when interest rates are already low or negative, and are now outweighed by the drawbacks of low interest rates – such as lowering demand from people and businesses whose income from their investments was crushed.

This is the point where reversal rates set in. At that point, the lower the rates go, the worse the economy gets. At that point, central banks can no longer counter an economic crisis because cutting rates further and doing even more QE would just make the problem worse.

In its Financial Stability Report, the Fed lamented once again, as it had done many times before, the historically high leverage and indebtedness of the nonfinancial business sector, and the risks this debt could pose for the financial system.

And I quote from the report:

If interest rates were to remain low for a prolonged period, the profitability of banks, insurers, and other financial intermediaries could come under stress and spur reach-for-yield behavior, thereby increasing the vulnerability of the financial sector to subsequent shocks.”

But the Fed is talking out of both sides of its mouth.

The warnings in the Financial Stability Report came, ironically, after the Fed has cut interest rates three times over the past few months, to encourage even more leverage and indebtedness. And it came after the Fed opened its vault and handed out $280 billion over the past two months in order to push down interest rates in the repo market, after they’d started blowing out.

This was an effort to bail out financial companies, such as hedge funds, private equity firms, mortgage real estate investment trusts, and banks that had taken too much risk borrowing short-term at ultra-low interest rates in the repo market to fund long-term speculations in mortgage-backed securities and the like.

This is precisely the yield-chasing risk-taking behavior that the report warned about. And the Fed just bailed out these entities and guaranteed that the market wouldn’t be allowed to function as a market with actual price discovery and risks. With this bailout, it further encouraged reckless risk-taking in the financial sector.

You can listen to and subscribe to my podcast on YouTube.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  104 comments for “Fear of “Reversal Rates” Sets in, Says the Fed

  1. Iamafan says:

    ** Keeping an Eye on the Repo **

    So after 9 weeks of the Fed Repo, they were able to bring the Stop Out OVERNIGHT interest rate to 1.55% after they tried to keep it at 1.80%.
    They succeded in doing this by using 3,481.40 billion (about 3.5 T) in repo. The H.4.1 will most probably print at 241.252 billion for Wednesday this week. In reality we went through 410.472 Billion nominal this week.
    They now have daily overnight repos of about $75 billion and 2 term repo of about 14 days each around $25-35 billion; every week. Add to that, they have about 2, $7.5 billion T bill purchases per week.
    Since Fed Repo and T-bill purchases will be going on for a while, you can imagine how much more money will be thrown into this mess in order to “stabilize” it. Nothing but a minor adjustment. Don’t Worry. It’s not your set folks.

    • WES says:

      Iamafan: To the best of my knowledge, the Fed just created new 14 day repos and also 48 day repos. Niether of these longer term repos existed until recently. An indication this crisis was more severe than they want to publically admit.

      • Wimpy says:

        I can’t pay my bills, but if you loan me money overnite I’ll be ok tomorrow is one thing. Its very different from ….. I can’t pay my bills, and you loan me money for 48 days then I hope and pray that I can pay them then. Those are two very, very different things.

        • Lisa_Hooker says:

          Thanks for the loan. FYI: in 47 days I’m going to have to borrow even more money. Just thought I’d let you know in advance.

    • frankie says:

      I live in the UK. Twelve months ago my wife bought two recliner sofas from a well known furniture shop. They offered her two deals, pay cash or pay over three years interest free. There was no discount for cash, so she choose the interest free option. Why is this of note, well the financial company providing the finance was Hitachi not a noted UK company. It seems in an effort to generate profit Japanese finance companies are willing to provide the money too UK furniture shops to run interest free promotions. Truely the search for profit knows no bounds.

      • MB732 says:

        Careful frankie…Say you got $10k in furniture at 0% for three years, so about $280/mo, then somehow your 36th payment was ‘late’. If penalty rate is 33% retroactive to loan origination, you now owe about $10k at 33% which is close to $280/mo in interest alone.

        THAT’S why they do interest-free promotions…

  2. seyborg says:

    Please DALIO has already laid it out in his books, and he’s 10x smarter than anybody in GOV, and probably on this forum.

    1.) First drop rates, did that to almost zero in USA
    2.) QE did that to almost infinity
    3.) helicopter money ( not done yet ), not massive 1,000’s of dollars to everyone with a breath
    4.) transfer massive quan of cash from rich to poor(gov), this happens if DEM are elected ‘maybe’, but this is last resort, something the PTB fear to the max

    we’re only at 2+ in this game folks, grab some beer & popcorn, enjoy the sodom&gomorah

    • Iamafan says:

      I might think that Dalio and the rest of the hedgies here in Fairfield Co., Connecticut, Westchester, and NYC are probably part of the problem.
      I doubt many ordinary people listen to them. Even if his book was free.

    • Bobber says:

      Number 3 and 4 would spike inflation, leading to higher interest rates, and it would be game over for asset prices. Thus, how much longer can they really kick the can? We could be at the asset price pinnacle right now.

      • medial axis says:

        It’s not so much kicking the can as spinning more and more plates, imo

    • weinerdog43 says:

      “…grab some beer & popcorn, enjoy the sodom&gomorah”

      If you think this situation WE are all stuck with is entertaining, you are a very sick individual. The crash, when it finally happens, is going to be horrifying and people will suffer even more so.

      • curiouscat says:

        But nevertheless the crash is necessary to restore some semblance of a financial system where risk is priced correctly. And the longer the situation continues, the worse the eventual outcome. Indeed, we should be encouraging the reset, not hoping it never comes, because it always does. And the longer the delay the more horrifying the eventual suffering of the average guy, especially if he is debt and loses his job. Did you learn nothing from what happened in the late 2000s? I suggest you watch The Big Short.

      • Bobber says:

        About as horrifying as a prick to the finger.

        There will always be demand for investment and jobs. Sure, there could be some temporary displacement as billionaires lose their desire to buy yachts and Teslas, but people still need to eat, drive, have shelter and enjoy life. Any recession would be temporary and provide the foundation for sustainable growth, instead of the monetary machinations and arbitrary wealth transfers we see today.

        People who want asset price reductions actually want the suffering, unfairness, and artificial B.S. to end.

        • Lisa_Hooker says:

          We’ve had a “recovery” and “growth” for a decade. I see no reason to believe that the next “temporary recession” can’t last just as long — or longer. It’s a cyclical thing.

    • RagnarD says:

      Yes Dalio is very smart and has made more money than Croesus. And I believe ur / his timeline or rather template is correct.

      But lots of people on here and in other places have been making similar forecasts for a LONG time.

      What makes Dalio different than the rest of us, is that has been able to time and ride the waves and thus profit from them.

      When I read Dalios PAradigm shift article my first reaction was, “ what took you so long?”. Well the jokes been on me, because I’ve been on the sidelines for years and he’s been riding the bubble up.

      He’s no dummy. He’s prolly been with the plan as early as anyone, he just knows how to time and ride the better than 99.9999% of us.

      And u forgot to add his action plan to ur 4 points
      Get GOLD

      He predicts gold to be the best performing asset for the next 10 years.

      Now that will surely be a paradigm shift.

  3. Rinaldo says:

    Thumb up! Really good article Wolf.

  4. Chris hannan says:

    Dear Wolf
    Excuse what may be a stupid question, but I’ve never understood how zirp or nirp can eat into a bank’s margins. Surely they just charge 1.5-2% (or whatever) on the rate that they borrow at, regardless of what that rate is eg either 1% or 10% base or interbank rate they just stick their margin on top?

    • Wolf Richter says:

      Chris hannan,

      In theory, you’re right, and central banks expected this theory to be borne out in reality.

      But in reality, it didn’t work out that way. Reality has shown that in NIRP situations, the banks’ cost of funding — particularly the interest on deposits — doesn’t drop as fast as the interest rates they can charge on their loans. In NIRP countries, once banks charge interest on deposits, deposits flee.

      In Europe, banks have started charging interest on business deposits, and they have gotten away with that because most companies only keep their current cash requirements at the bank, so these are essentially deposits that are difficult to reduce.

      And banks are charging interest on large retail deposits. But large retail deposits flee when the expense of keeping the money in the bank hurts too much. Only a couple of small banks have recently started charging small depositors. All this is happening after years of NIRP, during which time banks’ margins have gotten squeezed.

      This is an issue the ECB, the BOJ, and the SNB have been acknowledging. They were all surprised by reality – meaning people making decisions that don’t conform to what central banks want.

      • The spread between savings account interest and MM expanded about the time of the Repo spike, fear creeps back in and investors head for the safest choice regardless of the return. Small differences in perceived risk are sometimes large risks in real time, it’s all fear and loathing. They crash the market once in ten years, settle the issue with arbitrary and excessive methods, and live off the fear of investors for another decade.

      • WES says:

        Wolf:. In addition, in Switzerland, the banks have added bank fees to bank accounts to try and cancel out the incentives for pulling money out in cash.

        (Suspect the same may have occurred in some EU countries too?)

        As NIRP went lower the bank fees went higher to offset the gain for withdrawing cash.

      • former says:

        “In NIRP countries, once banks charge interest on deposits, deposits flee. ”

        Not if every bank is doing it in cashless society….

  5. Kent says:

    Zombie companies that should not exist squeeze the profit margins of surrounding businesses. What used to happen is that they would go bankrupt, and the lender would sell the commercial property at a discount significant enough to entice investors to renovate and re-organize out-dated commercial real estate.

    Seems like that stopped happening around late 2015 and 2016, like with old dinosaur hotels. These properties come up at online auctions on sites like Ten-X, but the mystery clearing price is seldom reached and by now most investors view these online auctions as a waste of time. Sometimes reputable established real estate agents are used, but the mystery owners refuse reasonable offers for businesses losing money and real estate that maybe should even be torn down because there is no business plan.

    • LB says:

      A very good point. If the system was operating normally the inability to generate a profit sufficient to pay anything owed to banks should result in companies being declared bankrupt and their departure from business would involve a sale of productive assets at knockdown prices to others who should be able to maintain a profitable business with reduced competition and other advantages when a zombie company disappears. But banks seem reluctant to pull the plug on them and keeps them going with more loans and it does as you suggest squeeze other companies who are being disadvantaged by the system failing to work as it did in the past where bankruptcy weeded out failing companies, and on the scale necessary for the economy to work according to academic economics.

  6. raxadian says:

    So… will the FED either NOT do a rate cut on December or actually raise rates on December using this report as an excuse?

    • Iamafan says:

      Re: “raise rates on December”. Doubt it very much.
      Powell said it would take “substantial” inflation for them to tighten.

      The T bill purchases are now down to the 8 week T bill level. It started with the 52 and 26 week ones. If you are a saver in the short end range of the T bill, you have been “repressed” to about 1.593% investment rate. 8,13, and 26 week bills are even lower. If the T bill purchases ($60b planned a month) keeps on going, we might see lowered short-term interest rates.

      I am a big Treasury saver, so this is hurting me.
      Happy holidays.

  7. RD Blakeslee says:

    “the negative effects of incremental easing – for example, weaker profitability of financial institutions or higher precautionary savings from retirees – might offset positive growth impulses.” from Fed report, quoted by Wolf.

    Here’s what the down-to-the-earth citizenry sees – no sophistication about it, just from what’s happening to their savings accounts: Saving is a “negative effect” – for them.

    But not for “the rich”:

    History says it has to end and what happens to bankers and their fiat money will be the least of it.

    • Wolf Richter says:

      I took out the link among other reasons because it didn’t work and redirected to the Yahoo homepage.

      I would prefer you summarized in a couple of paragraphs what the linked article said and then add the link as reference. But make sure the link works.

      • RD Blakeslee says:

        Sorry, Wolf. This is the second time this week that my CPU’s system has seemed to have a mind of its own; It opens the link directly to the story… Anyway:


        London “billionaires Row” is running out of room in its various safe spaces for rent, to store large volumes of physical wealth. Rentals are accelerating.

  8. Memento mori says:

    First time Trump met with Powell in December we got a complete reversal in monetary policy from QT and rate increases to rate cuts, stopping of QT, start of QE .
    They met again last week and Trump said they discussed negative interest rates.
    I say, negative interest rates are coming very soon.
    The Fed , the government, the media, are all hostage of the stock market now. They will throw the kitchen sink and some more at this thing if the stock markets turned south.
    Given how long Japan has been on this game without any major disruption, we are only getting started. This will go on for decades.

    • 2banana says:

      You may be correct but your timing is way off.

      Eight years of ZIRP and QE under obama.

      And literally, the day Trump takes office, interest rate rapidly explode higher and the great QE unwind commences.

      Interest rates.
      2016 – 0.20%
      2019 – 2.45% (high)

      Plus $500 billion+ of the Great QE Unwind since Trump took office (with some very recent un-unwind).

      Now – EVERY president, if given the choice, would rather have low interest rates vs high interest rates.

      But the FED sure seems to timed this for max political effect.

      If the FED was truly “independent” – ZIRP and QE would have ended two years into obama’s first time. And he would have never been re-elected with interest rates approaching 3% and no cheap and easy money of QE.

    • Unamused says:


      As the Tralfamadorians say, so it goes.

      • Lisa_Hooker says:

        Multiple time-variate views from the chronosynclastic infundibulum indicate that this can get worse before it gets better.

    • Petunia says:

      I don’t think they will cut rates, banking is now a cartel under fed direction, they have no competition. Trump understands the money is not trickling down and he needs it to flow. Helicopter money is the more likely scenario coming in the near future. This will beggar the opposition in many ways, 3D chess to infinity. Let them waste their time on more hoaxes.

    • 2banana says:

      You may be correct but your timing is way off.

      Eight years of ZIRP and QE under “hope and change.”

      And literally, the day DT takes office, interest rate rapidly explode higher and the great QE unwind commences.

      Interest rates.
      2016 – 0.20%
      2019 – 2.45% (high)

      Plus $500 billion+ of the Great QE Unwind since DT took office (with some very recent un-unwind).

      Now – EVERY president, if given the choice, would rather have low interest rates vs high interest rates.

      But the FED sure seems to timed this for max political effect.

      If the FED was truly “independent” – ZIRP and QE would have ended two years into “the one’s” first term. And he would have never been re-elected with interest rates approaching 3% and no cheap and easy money of QE.

      • Unamused says:

        If the FED was truly “independent” – ZIRP and QE would have ended two years into “the one’s” first term.

        Your argument is negated by the fact that the Fed continued nirpzirp and QE into the term of your current potus, who at long last proceeded to threaten them if they didn’t, in true ETTD form, thus compromising that ‘independence’ you falsely claim to value.

        Hope all that spin didn’t make you too dizzy.

        • 2banana says:

          I will type this real slow so you can comprehend.

          Interest rates.
          2016 – 0.20%
          2019 – 2.45% (high)

          $500 billion+ of the Great QE Unwind since DT took office (with some very recent un-unwind).

          Go ahead and try to spin these facts.

        • Unamused says:

          Non sequitur.

        • Just Some Random Guy says:

          The Fed raised rates 1 time in Obama’s 8 **YEARS**. They raised rates less than *A MONTH* after Trump was elected. But you know The Fed is all about helping Trump, N’ stuff.

        • njbr says:

          2016….GOP presidential nominee Donald Trump told CNBC on Monday the Federal Reserve is doing what President Barack Obama wants by keeping interest rates low.

          Fed Chair Janet Yellen and central bank policymakers are very political, and Yellen should be “ashamed” of what she’s doing to the country, Trump said, adding the Fed is not even close to being independent.

          By keeping interest rates low, the Fed has created a “false stock market,” Trump argued in a wide-ranging interview

        • DawnsEarlyLight says:

          If the FED was truly “independent” , you have misread the intention of the quote. Please slow down on future spinning.

        • Unamused says:


          2016….GOP presidential nominee Donald Trump told CNBC on Monday the Federal Reserve is doing what President Barack Obama wants by keeping interest rates low.

          The blatant hypocrisy is staggering on many levels. And par for the course.

      • Iamafan says:


        If you are trying to say that the Fed babied O and not T, then you are correct.

        Rates were only increased ONCE in Dec 2015 from 0- 0.25 and the second time was DEC 2016 when O was on his way out.

        When T was elected rates were increased at least 8 times from 0.50-0.75 to a max of 2.25 – 2.50.

        The Fed bought more than 3.7 Trillion of Gov’t Securities during O’s term. Then the Fed let them mature and rolled off about -632 Billion during T’s reign.

        That’s why T has been complaining.

        • Unamused says:

          That’s why T has been complaining.

          Also because everybody’s picking on him, poor guy. Also because he whines like he never got past the Terrible Twos.

      • Bobber says:

        Rates should be higher if the current economy is the best the world has ever seen.

        • Unamused says:

          Budget deficits should be lower, too, and the US middle class shouldn’t be scheduled for termination.

          I guess that promise to eliminate the US national debt was just more blatantly phony grandstanding, although there are other things you could call it.

    • akiddy111 says:

      I tend to agree with this comment as well as other comments you made recently.

      The reality is that the Fed does not have the power or the will to stop negative rates. What the Fed says or thinks is irrelevant. Period.

      I liked when Buffett said at his annual Berkshire meeting in 2008 that he could care less if Ben Bernanke abruptly eloped to South America with Paris Hilton. Priceless.

  9. Brant Lee says:

    The last 1.75% or so will be thrown at the minor (or major) stock market corrections coming in 2020. Then Trump will have to back off the Chinese tariffs to prop the Dow, he hopes not before elections. It’s all about timing in 2020. Can anyone imagine Trump being a lame duck for two months?

  10. Unamused says:

    In fact, it’s not even a theory, but reality.

    Sometimes a theory is also a fact, which is to say, reality. It only need be well-supported. Gravity is a theory. It is also a fact. There are many examples.

    the lower the rates go, the worse the economy gets.

    They can’t raise rates either, because that would make a lot of debt unserviceable and then the defaults detonate. No help there.

    Historically this situation was avoided by taxing the rich and letting them take their gambling losses. But CBs and federal governments, both controlled by bank cartels, are in the business of enriching the wealthy at public expense, so that’s not going to happen. Instead, they decided to bleed the real economy to preserve the ill-gotten gains of the investing class, and now the real economy has been seriously bled.

    Looks like they’re trapped. Glad I stayed out of it so I can wallow in schadenfreude from a safe distance.


    My beacon’s been moved under moon and star
    Where am I to go now that I’ve gone too far?

  11. Keepcalmeverythingisfine says:

    Right you are Memento mori. I am shocked the DJT met with the Fed about 1 year away from election day, just shocked:) I am certain they did not discuss what can be done to keep the economy going (lower rates, QE, etc.).

    Seriously, it is time to stop looking at the CPE (or whatever the Fed uses) for tracking inflation and start focusing on asset inflation, because that pile of cash in a money market or short term Treasuries is an “asset.” You are probably not using that cash to buy socks or get a haircut.

    • backwardsevolution says:

      Wait, Obama gets bailed out for eight years, but you’re “shocked” when Trump asks for the same courtesy?

      • Keepcalmeverythingisfine says:

        I think you missed my sarcasm:)

        Politicians certainly have a spending problem. Each administration ups the debt ante. One appears to be no better than the other when it comes to fiscal responsibility.

        • backwardsevolution says:

          Keepcalm – yes, I did miss your sarcasm. Thanks for clearing that up:)

          Agree on politicians. Have a great day!

  12. timbers says:

    Regarding Trump/Powell meeting….As the folks at Naked Capitalism say “Trump says the quite part out loud.” It’s clarifying he publically demands NIRP and other policy that benefit the rich and throws those who supported him under the bus. Do you think many will notice? (Not to suggest the other team is the answer).

  13. Iamafan says:

    The Treasury just bought back $25,000,000 in bond buybacks.
    5 CUSIPs were just bought back.

    To understand what a bond buyback is, please read:

    The stated coupon rates were an extremely low 0.125-0.625%
    Most of them were 10Y notes. The most recent 10Y rate last Nov. 6th was a high of 1.809%

    Therefore we gave up notes at a super low interest rate, and later the government and will have to replace them with notes at a much higher interest rate.

    Go figure …

    Here’s what he said:
    “I would borrow, knowing that if the economy crashed, you could make a deal.” He later clarified that he did not mean that he would default on the debt and added that “This is the United States government….you never have to default because you print the money.” Instead, he said he meant that, “if we can buy back government debt at a discount, in other words, if interest rates go up and we can buy bonds back at a discount — if we are liquid enough as a country, we should do that.” This action, known as a Treasury buyback, would have the government purchase older-issued bonds at a discount and allow investors whose bonds are purchased to get newly-issued securities with higher interest rates (buybacks can be used for other purposes as well).

  14. Paul Gibson says:

    Isn’t the major reason the Fed has been cutting rates is because the USA interest rates in USA are significantly higher than rest of the world? This differential causes higher demand for dollars, making the dollar stronger and negatively impacting trade.

    • Just Some Random Guy says:

      BINGO! It’s a very simple concept to understand, but so many refuse to do so.

    • KGC says:

      Please. Let the dollar get stronger. Let businesses fail. Let countries with bad monetary policy readjust to reality. As bad as it’s going to be here in the USA it’s going to be worse everywhere else.

      • Just Some Random Guy says:

        “As bad as it’s going to be here in the USA it’s going to be worse everywhere else.”

        Thank God people like you aren’t in charge.

      • Unamused says:

        As bad as it’s going to be here in the USA it’s going to be worse everywhere else.

        Too bad people like you aren’t in charge.

    • Iamafan says:

      Exactly. As the reserve currency, we look around and call the shots.

    • DawnsEarlyLight says:

      True that, but unfortunately dollar strength is only one side of the equation in the cost of what is being traded. (ie: labor cost)

  15. California Bob says:

    ‘Reversal rates’ kind of remind me of the aviation expression ‘flying on the backside of the power curve’ (sometimes cited as the origin of ‘behind the curve’ and also called the ‘area of reverse control’)*. Almost all aerodynamics curves look like the Nike ‘Swoosh;’ on the right-hand side of the curve, control inputs act as expected: pull back on the stick/yoke, and the aircraft climbs; push forward and it dives. On the left hand side, when the aircraft is remaining airborne only because of max angle of attack and full power, pulling back on the stick/yoke causes the aircraft to descend and, at some point an aerodynamic stall occurs (often cited in NTSB accident reports). Though in unrelated fields, the analogy is almost unnerving.

    *MC01 knows this.

    ps. I’m feeling pretty smug about putting a big chunk of cash in a 13-month CD @ 2.5% last year; amusingly, it has a ‘one-time bump-up’ option should rates rise appreciably.

    • TruckMan says:

      I’ve spent some time flying on the backside of the power curve, and I like your analogy. What the Fed seems to have forgotten is that retirees in particular have experienced bad times before, so there comes a time when we will reduce risk, even though it loses us a little interest. We’ll also spend to save. I bought a shovel and seed onions for $40, and will $60 less on onions over the winter. Next year, I’ve still got the shovel. I’m no longer in stocks. I’m mainly consuming to reduce future expenditure now. To complete the analogy, I’m shoving the nose down to gain speed, at the loss of a bit of height whilst I’ve still got a bit of height, so I can lift the nose later and get the heck out of here.
      The Fed is assuming we can’t predict the future and will only react to what they do now. They need to get out more, because they are deeply wrong.

      • Unamused says:

        And that, dear friends, is how aviation is like home economics.

      • Lisa_Hooker says:

        As I said elsewhere, a lot of the retirees are not as ignorant and stupid as the FED assumed. For many, a safe dollar is worth more than a maybe dollar.

  16. fred flintstone says:

    So the morons are finally figuring out that if a retiree has 4 million dollars and earns $200,000 on it he might spend a little more than if he earns $40,000.
    If a bank has a healthy margin it will lend……..
    If cash is not exported by an unhealthy trade imbalance demand will increase and inflation will result
    If we stop giving tax breaks and use the cash to build infrastructure demand will result…
    Gosh…..these PHD’s only needed a decade to figure it out……the same group that ran the Vietnam war. We need a huge estate tax increase…….the leadership in this country is stale. Keep the income tax low.

    • Just Some Random Guy says:

      “If we stop giving tax breaks and use the cash to build infrastructure demand will result…”

      The federal govt spent $2T in 2000. The budget for 2019 is $4.4T. A 220% increase. Even if you take into account inflation and population growth, it’s still an insane amount compared to 2000.

      And yes in 2000 we had highways and airports and a military and schools and everything else we have today. Yet somehow miraculously we did much much cheaper.

      We don’t need more taxes, we need an ax taken to the federal bureaucracy.

    • Iamafan says:

      Yup, the war on savers is causing me to not go shopping.
      I have no intention to go out on the risk curve. So I just plan to live off my principal if the interest income is not enough. Some people are just too old or sick to go through another drawdown.
      They simply want LOW interest rate to keep the debt extravaganza going.
      One day this may all blow up.

      • WES says:

        Iamafan: Calling it what it is “A war on savers”!

        Prior to 2008 my spending exceeded $100,000 per year all self funded. And I paid plenty of income taxes.

        After 2008 about $30,000 or less per year. Half of that amount coming from the government. The other half came from eating my capital. I have not paid any income taxes in over a decade.

        I have not declared one red cent of taxable interest income in over a decade.

        I am a perfect example of what NIRP has wraught.

        • DawnsEarlyLight says:

          Same here WES. If they want to penalize saving money and non/low debt spending, then let them starve on an ever increasing diet/dependence of debt!

    • Zantetsu says:

      A retiree with 4 million has already accumulated enough capital to give himself a comfortable life for his remaining days even if he makes interest only at the rate of inflation.

      At some point that dude needs to spend that money and forgive the IOUs that he has hanging over the heads of his fellow citizens instead of retaining them indefinitely and only increasing them.

      A return of $200,000 per year will just keep everyone indebted to him longer. Which I guess is fine as long as most of what he has goes back to the state when he dies. But this doesn’t happen anymore does it? Estate taxes have been vastly reduced.

      • Bobber says:

        I can’t blame the retiree with $4M for not spending or drawing down his principal. Stocks could lose 50% because of the bubble the Fed has created. A retirees’s $4M may really be $2-3M, if some stocks are in the mix. Also, if the Fed goes negative on rates and inflation ramps up, which the Fed says it would be comfortable with, the purchasing power of that $2M could drop very quickly, especially given consistent understatement of the inflation statistics. Throw in a medical condition, and you could be in the poor house.

        This is the problem with Fed policy. The policy insanity creates so much uncertainty for savers, people anywhere near retirement have to save a ton to guarantee survival. If the Fed weren’t acting so radically, people could prepare accurate forecasts, rely on them, and spend the excess accumulation.

        With an impaired Federal Reserve at the wheel, we are clearly fishtailing, and we’re likely to go off the road, like in 2000 or 2008. You can’t take anything for granted these days, because the Fed made it so. As a little guy, you need to accumulate as much wealth as possible in response to it.

  17. It sounds to me like the perfect excuse to stop cutting interest rates and just do QE instead. I know this article suggests that QE will make the problem worse. But the arguments presented only suggest that lower interest rates will result in lower spending. Everyone knows QE will levitate asset prices and encourage more spending. Even DiMartino Booth recently (prior to the rate cuts) suggested that we shouldn’t lower interest rates, but just do QE instead. With taxes and low interest rates people feel something is being taken from them, so for now QE seems like the path of least resistance.

    • Iamafan says:

      Re: Everyone knows QE will levitate asset prices and encourage more spending.

      The first part is correct. QE causes asset inflation.

      But the second part is not proven. If assets only belong to the 1%, spending does not increase much. Money needs to get to the masses.

  18. Hg says:

    There was a party in the woods one night when the police arrived sneaking up on them in night gear. The revelers scattered leaving their vehicles behind. One climbed a tree but was easily found out by police with infrared goggles. ‘Come on down we can see you up there’
    ‘Ka-Caaa!’ came the reply…

  19. Reversal Rates are moveable. Interest rates at the level of inflation, or below, are by definition enough to indicate economic contraction (negative yield). https://www.stlouisfed.org/on-the-economy/2019/april/real-interest-rates-tell-recession-follow. The real rate of return is never going to turn positive as long as consumers remain on the debt side, (only non-consumers save) they borrow at asset inflation rates, and save or collect interest at or about CPI rates. It’s also possible to lower asset inflation, which is not good news either. The Reversal Rate will be the goal posts that keep moving, and permanent economic contraction. At least we have the facts.

    • Wimpy says:

      What’s a ‘non-consumer’? Are we talking robots?

      • Unamused says:

        We monks are non-consumers. Being self-sufficient, we don’t spend much money on, well, just about anything, although the chauffeuse says the Bentley is going to need new tyres next year.

        Actually we’re sort of just friars. So I can curse all I want, dammit.

        • Most fixed income become non-consumers. The point on boomer retirees, should it follow the historical pattern, anecdotally, is the longer you are retired the poorer you become. You become less mobile, spend less. This I think is the case in Japan.

      • RD Blakeslee says:

        I do try to be. But, try as I might, I’m 88, weigh 210.

  20. doug says:

    Wow. Just received my MUG! Environmentally packed, Quick shipped, Doesn’t leak, Art work excellent, Handle fits hand perfectly with nice thumb spot. The formerly attached label is hanging in the office.
    This mug is a deal…

    Thank you. For all you do.

    • Wolf Richter says:


      Glad you like the mug. I love those mugs. They’re making fun of me in the way I like to be made fun of. And in their gentle manner, they’re making fun of the world :-]

      For those who haven’t seen them, you can take a look here. The design wraps around the mug, so make sure you look at all sides:

      Tip: the “Buy Now” button leads to the page with the photos of all sides of the mug, and you can magnify the images, etc. Pretty cool.

      • Unamused says:

        And in their gentle manner, they’re making fun of the world

        And making a dire warning about imminent economic catastrophe at the same time.

  21. Andrew C Stanton says:

    According to my reading of the rules, the Social Security Trust Fund invests in special Treasury debt that is not available to the public BUT the interest rate on that debt IS set by the rates of publicly available Treasury debt. If Treasury rates go negative then either they will have to change the rules or Social Security will go belly-up even faster than currently predicted.

    • DawnsEarlyLight says:

      Which means a higher future payroll tax, benefit cuts, and a faster depletion of the (supposed) accumulated special treasuries.

  22. Just Some Random Guy says:


    I realize you can’t control the ads that pop up here and it’s all keyword generated, etc. But I find it ironic that while you pound the table hard against debt, I keep getting a bunch of “Low Low Low Interest Rate” type ads, mostly for cars, sometimes mortgages.

    • Wolf Richter says:

      Just Some Random Guy,

      I get tons of ads from startups with funky names that are selling bras and swimsuits and the like. They use the most wonderful models these days — real women not the stick figures of yore. Unfortunately, I’m not allowed to click on ads on my own site. You’re missing out with your debt ads :-]

      But I also get a ton of ads for new condos in San Francisco, both preconstruction and move-in ready, all high-end. That sort of density is a fairly new development. Makes me wonder.

  23. Jeff Relf says:

    What would happen if the Fed sold its trillion $ positions
    in Fannie Mae and Freddie Mac ?


    • Iamafan says:

      The Fed has about $1.450 Trillion of Agency MBS. I don’t think we can find a buyer big enough.
      The FED can not roll-over any MBS that prepays. But that will probably make it very hard for Freddie and Fannie to create and sell newer MBS.
      This will hurt our ability to create 30Y mortgages – a rare American privilege.

      • Unamused says:

        I don’t think we can find a buyer big enough.

        Probably not. If the Fed sold its positions in Fannie Mae and Freddie Mac it would probably crash the market for their debt, so it would have to be timed carefully.

  24. George says:

    2 Banana. Federal Fund Rates on Obama’s last day , January 20, 2017, were .75%. Janet Yellen raised three more times finishing the year at 1.5%.
    Jerome Powell raised four times in 2018 to 2.5%. 2019 saw him lower three times to 1.75%.
    My point being rates are 1% higher today than when Trump came into office. A 500 billion dollar unwind is a small fraction of Fed total balance sheet. And now it’s all coming apart?


  25. Satya Mardelli says:

    When does a CB know they are about to cross the Rubicon of reversal rates? Japan apparently did so about 30 years ago but may have been unaware of the theory/reality.
    Also, how does one get out of this rate trap? Does it require a worldwide depression to get a fresh start?

  26. Adam says:

    The point is that all the negative yielding debt is negative as there is too much money in the system. Hence negative rates are a function of money supply by the central banks.

    Now, debt is the income of others and you argue because of yield down or negative there is less income to spent.

    Ok, however I see to some degree negative rates as to protect the lenders from paying monday e.g. generating income to central banks who originally lended the money to banks who lended the money to corporates etc. To some degree you can argue then that the dollar lended by FED etc should not really contribute to the GDP as it is just “virtual money” printed by central bank without underlying value to it. The value of this working capital must be therefore zero or inverse.

  27. Lisa_Hooker says:

    As a retiree I estimate that FED policy over the past decade has removed well over $250,000 of my personal spending from the US economy. That’s just me, one person. A major problem for the FED is that many people are not as stupid and/or ignorant as the FED thought they were.

    • Sary Qasim says:

      You are right Lisa,
      In my humble opinion: Capitalism in general are started the complete fall down level, and it will be destroyed in less than two years…
      The FED and central banks will be totally helpless in the next crises and the globe will lose his trust of the current world financial system (where some already did)…
      The alternative choice to rule the world financial systems is more closely to be a Bitcoin or similar decentralized ledgers where third parties will be dismissed from future calculations/ transactions, and more trust to be given for a non human calculations..AI and decentralized Systems will rule

      Well, this is just my own imagination of the next level …And Let’s hope things will move smoothly without catastrophic losses?

      Kind Regards

  28. andy says:

    Now that the Fed (owned by banks) has worked out that we have reached reversal rate, (which is bad for banking business) I guess rates wont go lower……

  29. andy says:

    I’m just amazed Alan Greenspan and his lackey Ben Bernanke didn’t understand reversal rates earlier. Maybe the point is they did, but knew they could get 2-3 years out of them before the pain for those affected got too much to bear.
    We are now clearly at that point.
    Interesting. Stagflation here we come.

Comments are closed.