The New York Times - 12.09.2019

THE NEW YORK TIMES BUSINESSTHURSDAY, SEPTEMBER 12, 2019 N B5

ECONOMY

potential benefits of negative

rates are limited.” He added that it

would “probably be worthwhile

for the Fed to conduct further

analysis of this option.”

Why are we still talking about

them?

For all of their challenges, nega-

tive rates are likely to remain in

the headlines in America and

abroad. That is because central

have been below zero for seven
years, banks have introduced neg-
ative-rate mortgages. Practically,
that means borrowers’ outstand-
ing balances are reduced by more
than they pay in a given period.
If negative rates became a reali-
ty in the United States, consumers
could face new charges. Jamie Di-
mon, chief executive of JPMorgan
Chase, said this week that the
bank had begun to discuss what
fees it could introduce if interest
rates fell to zero or below.
And investors definitely feel the
aftershock. In the eurozone and
Japan, about 70 percent of govern-
ment bonds now have a negative
yield, according to the data
provider Tradeweb. Rates on the
securities have tumbled this year
amid concerns about global
growth.
By the end of August, the
amount of government and corpo-
rate bonds investors are paying to
hold had reached a record of about
$15 trillion, according to Deutsche
Bank.

How are they working out
abroad?

The policies have a mixed report
card. Critics’ fears that they would
touch off widespread cash hoard-
ing did not materialize in Europe.

At the same time, it is hard to
tell how well they are working,
partly because it is impossible to
know how the economies that
have employed them would have
fared in their absence. Recent
E.C.B. research has found that
negative rates have spurred
greater lending; other papers find
that they result in fewer loans. Re-

search has suggested that Japan’s

negative rate policies may have

backfired, actually lowering infla-

tion expectations instead of firm-

ing them, as hoped.

Are they coming to America?

The United States has always

faced unique challenges in adopt-

ing negative rates. For one thing,

it is not yet clear that the Fed has

the legal authority to charge

banks interest on their excess re-

serves — then-Chair Janet L.

Yellen said in 2016 that the issue

required further research. If law-

yers determine that negative

rates are allowable, they might

still be politically contentious. The

Fed cut rates to near zero during

the Great Recession, but it has

never breached that dividing line.

They also could be practically

difficult to enact, said Julia Coro-

nado, founder of MacroPolicy Per-

spectives in New York. Money

market mutual funds are more im-

portant to day-to-day market

functioning in the United States

than in Europe and Japan. The

funds’ business models would suf-

fer in a negative-rate envi-

ronment, so a move to negative

rates could be destabilizing —

hardly the goal of a policy that is

meant to soothe markets and the

economy.

Another former Fed chair, Ben

S. Bernanke, pointed out in a 2016

blog post that some of the con-

cerns around money market

funds had been alleviated by re-

cent policy changes, though they

had not been eliminated. He con-

cluded that such costs now “ought

to be manageable,” but that “the

bankers are likely to get stuck at

zero interest rates often in the fu-

ture — Fed economists’ best

guess is that it could happen as

much as a third of the time in the

United States.

That is happening because

long-running trends, including

demographics and savings behav-

ior, have depressed the level of in-

terest rates that central banks can

maintain without curbing growth.

And it matters because it leaves

policymakers with less room to

stimulate the economy via their

most effective monetary policy

tool.

The Fed is still in a better posi-

tion than many central banks: it

can lower borrowing costs, buy

securities to stoke growth, and

pledge lower-for-longer interest

rate policy come the next down-

turn.

But negative rate policies also

have some fans domestically, out-

side of Mr. Trump. Federal Re-

serve Bank of San Francisco re-

search this year argued that nega-

tive rates could have made the last

recession less painful, helping the

economy to return to full strength

earlier.

Why does Mr. Trump care?

Mr. Trump has been attuned to

negative rate policies abroad as

the European Central Bank looks

poised to slash a key rate further

below zero. Mere anticipation of

that move has caused the dollar to

strengthen against the euro, mak-

ing American exports less com-

petitive.

“The Euro is dropping against

the Dollar ‘like crazy,’ giving them

a big export and manufacturing

advantage ... and the Fed does

NOTHING!” Mr. Trump tweeted

on Aug. 30.

Germany is Europe’s largest

economy, and it looks to be on the

brink of sinking into recession.

The United States, on the other

hand, has maintained solid output

gains and strong consumer

spending.

That said, there are risks on the

horizon in America that are

prompting the Fed to lower rates

— albeit much more slowly than

the White House is urging. Those

include a global manufacturing

slowdown and Mr. Trump’s trade

wars, which are rattling business

and consumer sentiment.

Here’s How Negative Interest Rates Could Play Out

Source: Refinitiv THE NEW YORK TIMES

–1

0

1

2

3

4

5

6

7

8

9%

Denmark

Sweden

Britain

Germany

United

States

Japan

’95 ’10 ’05 ’10 Switzerland

Plotted monthly

’15 ’19

10-year

government

bond yields

Interest Rates Falling

Through the Floor

FROM FIRST BUSINESS PAGE

Stephen Grocer contributed report-

ing from New York.

WASHINGTON — President Trump
on Wednesday urged that the Fed-
eral Reserve cut interest rates to
zero or even usher in negative
rates, suggesting a last-ditch
monetary policy tactic tested
abroad but never in the United
States.
His comments came a day be-
fore European policymakers are
widely expected to cut a key rate
further into negative territory.
In a series of tweets, Mr. Trump
said, “The Federal Reserve
should get our interest rates down
to ZERO, or less, and we should
then start to refinance our debt,”
adding that “the USA should al-
ways be paying the the lowest
rate.”
Mr. Trump continued to criticize
his handpicked Fed chair, Jerome
H. Powell, saying, “It is only the
naïveté of Jay Powell and the Fed-
eral Reserve that doesn’t allow us
to do what other countries are al-
ready doing.”
He concluded by calling Mr.
Powell, whom he nominated to
head the central bank in 2017, and
his Fed colleagues “Boneheads.”
Mr. Trump’s request is extraor-
dinary for several reasons. The
United States economy is still

growing solidly and consumer
spending is strong, making this an
unusual time to push for mone-
tary accommodation, particularly
negative rates, a policy that the
Fed debated but passed up even in
the depths of the Great Recession.
It is also typical for countries with
comparatively strong economies
to pay higher interest rates, not
the “lowest” ones.
But Mr. Trump is facing an eco-
nomic slowdown in the United
States as the effects of his trade
war with China and slowing global
growth begin to rattle consumer
confidence and threaten business
investment, particularly in the
manufacturing sector. With the
2020 election looming, Mr. Trump
has begun looking for ways to
keep the economic expansion go-
ing strong. Along with calling on
the Fed to lower rates, he’s also
mulled additional tax cuts.
The president’s call for negative

rates is a major escalation from

what the White House was de-

manding from the Fed six months

ago. Mr. Trump and his colleagues

have quickly gone from calling for

a moderate rate cut to urging neg-

ative borrowing costs.

Mr. Trump’s economic advisers

met on Wednesday to continue

discussing ways to push through

more tax cuts, such as a payroll

tax cut, along with the legality of

using executive authority to index

capital gains to inflation, accord-

ing to an administration official.

Treasury Secretary Steven

Mnuchin, who attended the meet-

ing, said on Tuesday that the

Trump administration would be

examining “tax cuts 2.0” as some-

thing to consider in 2020.

The president has said repeat-

edly that the economy is doing

“great” and has accused the news

media and Democrats of trying to

sow economic uncertainty. Mr.

Trump’s optimistic economic di-

agnosis makes his demand for

negative rates, essentially an

emergency policy option that cen-

tral banks turn to after having ex-

hausted more conventional ways

of stoking economic growth, all

the more striking.

But Mr. Trump increasingly

sees the global economy as a win-

ner-take-all game, one in which

countries compete on exchange

and interest rates. The president

has repeatedly criticized other

governments for trying to protect

their economies by lowering rates

or providing more stimulus, view-

ing those actions as working

against America’s growth.

Negative rates, which have

been used in economies including

Japan, Switzerland and the euro-

zone, mean that savers are penal-

ized and borrowers rewarded:

Their goal is to reduce borrowing

costs for households and compa-

nies to encourage spending. But

they come at a cost, curbing bank

profitability.

While it’s unclear how effective

they have been as a policy tool —

some research suggests negative

rates could curtail lending — they

are increasingly a reality in much

of the world as central banks rush

to support economic growth and

investors look for safe assets.

The timing of Mr. Trump’s tweet

is significant. The European Cen-

tral Bank is expected to cut a key

interest rate to a record-low nega-

tive 0.5 percent and roll out addi-

tional stimulus measures on

Thursday, in a bid to shore up very

low inflation and waning growth

in important economies like Ger-

many. Central banks around the

world have been lowering their

policy rates, partly because Mr.

Trump’s trade war is combining

with Brexit jitters and a global

manufacturing slowdown to

threaten growth in many nations.

The president has commented

on foreign central bank rate

moves before, tweeting in June

that “they have been getting away

with this for years,” when Mario

Draghi, who heads the European

Central Bank, indicated that offi-

cials might provide additional

stimulus to shore up the eurozone

economy.

The Fed itself has already cut

rates and is poised to lower bor-

rowing costs further as risks to

economic growth loom. Mr. Powell

and his colleagues lowered rates

for the first time in more than a

decade in July to a range of 2 per-

cent to 2.25 percent, and they are

widely expected to cut by another

quarter of a percentage point at

their meeting next Tuesday and

Wednesday in Washington.

“The Fed has, through the

course of the year, seen fit to lower

the expected path of interest

rates,” Mr. Powell said in a speech

last week, adding “that’s one of

the reasons why the outlook is still

a favorable one, despite these

crosswinds we’ve been facing.”

Since Bill Clinton’s presidency,

the White House generally

avoided commenting on Fed pol-

icy. Mr. Trump broke with that tra-

dition starting last July, and econ-

omists say that his now-frequent

attacks on the central bank and

Mr. Powell personally carry a risk

for the institution.

The Fed is tasked with setting

monetary policy with an eye to-

ward the longer term — figuring

out how to keep employment and

inflation steady over time. But Mr.

Trump’s regularly voiced opinions

create a risk that anything the Fed

does could be seen as either capit-

ulation or resistance.

“Anything they say or do will be

seen against the backdrop of

Trump’s attacks,” said Eswar

Prasad, an economist at Cornell

University and former Interna-

tional Monetary Fund official.

That’s especially tough at a time

when the Fed is already puzzling

over what to do with rates, given

strong economic data but mount-

ing risks to the outlook.

“If the data were unanimous

and if there were consensus on the

Federal Open Market Committee,

which lately there is not, it would

be different,” Mr. Prasad said.

“The risk is that a rate cut could

get interpreted as the Fed just try-

ing to placate Trump.”

Trump Wants Fed’s ‘Boneheads’ to Slash Rates Below Zero

By JEANNA SMIALEK

The president has often criticized,
Jerome H. Powell, the Fed chair.

ARND WIEGMANN/REUTERS

A policy tactic tested

abroad but never in

the United States.

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