Did Yellen Just Greenlight Negative Interest Rates?

Federal Reserve chairwoman Janet Yellen may have just opened the door to negative interest rates in the US. Otherwise known as NIRP (or ZIRP), negative rates are one of the most dangerous monetary policy instruments ever created.

The idea behind them is to discourage commercial lenders from storing cash with central banks. That gives banks an incentive to borrow as much as credit as possible.

In theory, lenders will have no choice but to loan out money to businesses and individuals like a running tap. That, policymakers argue, would then boost economic growth through increased spending in the economy.

In practice, things work differently. As we’ve seen with the European experiment with NIRP, theories are just as their names suggest. What we’ve seen instead is rising asset prices, often coming at the expense of economic growth. Why would people store their cash with banks if their returns are lower? They wouldn’t. They’d look for higher yields elsewhere, like in stocks.

For all intents and purposes, NIRP is a sham. But it’s more than that — it’s a war on cash. It’s a means for central bankers to push up asset prices, and set the ground for the elimination of cash.

I explained this in a recent article. Here’s what I wrote at the time:

NIRP and cash don’t mix well together, and it’s the single biggest reason why central banks want an end to cash.


If you’ve got cash at a bank, that money earns interest for you. As every saver knows, the higher the rates of return, the better off you are. That’s how things have worked for centuries, until the creation of central banks a century ago, anyway. 

Since then, central banks have used their control of monetary policy to regulate the flow of capital across economies. These policies have evolved over time. They’ve become ever more aggressive in an attempt to ward off downturns.

When rates eventually reached the point of no return, the banks raised the stakes. Instead of reining in credit once interest rates hit near zero, bankers got creative. This birthed negative interest rates.

It should be treasonous that we live in a world where NIRP is a reality. Unfortunately, it’s not only legal, but central banks want to expand its use. And they see cash as the only barrier.

NIRP is bad for you for a single reason. When rates go into negative territory, you’re essentially paying banks to hold your money. If you were faced with the prospect of paying banks to store money, would you? Probably not. You’d be far better off keeping your cash stashed under the bed.

Now, it’s true that there’s a difference between central banks and commercial banks. As yet, no commercial bank charges customers to store their money with them. But central banks hold the levers of all capital in the system. Which means they influence how much banks can borrow, and lend. And it also affects the rate at which lenders charge borrowers for storing their money or taking out loans.

In any case, the point remains. There’s a ripple effect when it comes to NIRP. Central banks don’t set the rates for your savings account, but they influence it by setting borrowing rates for commercial banks. But all bankers know that if interest rates went into the negative, people would start pulling their money out of banks.

The solution to this ‘problem’ is the nothing short of eliminating cash altogether.

We’ve been saying for months that it was a distinct possibility the Fed would entertain the idea of NIRP. Well, it’s much more than an idea now. In fact, it’s become an increasing likelihood that US rates will drop to zero (and beyond) soon.

What makes us so certain the Fed would contemplate NIRP? Recent comments straight from the horse’s mouth, Janet Yellen, made certain of it. Here, take a look for yourself at what Yellen had to say (emphasis mine):

I would say that [NIRP] remains a question that we still would need to investigate more thoroughly. I am not aware of anything that would prevent us from doing it, but I’m saying we have not fully investigated the legal issues that still needs to be done.

I do not expect that the FOMC (Fed) is going to be soon in the situation where it’s necessary to cut rates. [But negative rates are] something that, in light of European experience, we will look at, we should look at — not because we think there is any reason to use it, but to know what could potentially be available.

Yellen wouldn’t be making these kinds of statements if the Fed wasn’t seriously contemplating it. Leaving the door open to NIRP is as good as saying you’re merely waiting for the right time to unleash it.

In response to this, some people have flagged up a 2010 internal staff memo as a potential stumbling block. This memo appeared on the Fed’s website last month, casting doubt on the legality of NIRP. It suggested the law on paying interest on excess reserves, known as IOER, might limit the Fed’s power to lower rates below zero.

Yet, when there’s a will, there’s a way. And clearly Yellen doesn’t think it’d be much of a problem either.

As for the reasons the Fed might entertain NIRP, that’s easy. Weak US economic indicators. Worrying global economic slowdown. Carnage across commodity and stock markets. You name it. Everything’s a problem these days.

It’s an idea that’s gained a lot of steam in the past month in particular. And Japanese and European central banks have already shown an inclination for it.

People laughed at the idea of negative interest rates in the US. They said that we were heading towards a new cycle of rising interest rates. That the great rate ‘lift off’ in December was a stepping stone for a future where global credit was reined in.

They were wrong. Welcome to the new central banking monetary policy. It looks a lot like the old one…

Mat Spasic,

Junior Analyst, Markets and Money

PS: Central bankers’ monetary manipulations are nothing new. Banning cash is the final frontier for them to maintain low interest rates as long as they want. Markets and Money’s Phillip J. Anderson reckons interest rates will remain at current record lows for years.

In his brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’, Phil warns that you won’t be able to rely on your savings to fund your retirement.

Inflation, stemming from low rates, will eat into your savings. Worse still, you won’t be able to count on savings funding your retirement. The regular return on term deposits has halved in the last four years alone.

But you have options…if you choose to act now.

Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four-step strategy that could boost your portfolio and wealth. You’ll learn exactly where to park your cash over the coming decades. And you’ll see how this could lead to incredible profits. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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