Outlook Worsened: Negative Rates from the Federal Reserve? Really?

Federal Reserve Janet Yellen
On 4 November 2015, Janet Yellen purported that the Federal Open Market Committee (FOMC) would be willing to lower the federal funds rate into negative territory if US economic conditions deteriorated further.

The United States faces many problems — a massive welfare state, complicated tax code, oversized government, over-regulated economy, and bloated education system. After a flurry of astigmatic regulation designed to promote home affordability created a $4 trillion housing bubble and ensuing financial crisis, most would hope that a nation as powerful as the US would finally get its act together. That pretence was simply false.

Since 16 December 2008, the FOMC has maintained a policy of 0% interest rates on federal funds, overnight funds traded between banks to maintain their deposits at the Fed. This was aimed to push interest rates far below Wicksellian (equilibrium) level and create another asset bubble. While this would result in another recession after a burst, the Fed has not been an organisation known to be concerned with long-term stability since the passage of the mandates set forth in the Federal Reserve Reform Act of 1977.

In addition, the FOMC maintained a policy of quantitative easing from 2008 to 2014. The policy  administered $3.5 trillion in asset purchases in the secondary market, with a goal of suppressing yields on government bonds to shift the allocations in investors’ portfolios to riskier assets such as stocks. Considering that the DJIA has more than doubled since the end of the financial crisis, QE clearly served its purpose in securities markets. In another respect, however, the program failed tremendously.

This current expansion is the slowest in the entire economic history of the United States. GDP growth has averaged 2.2% since the end of the financial crisis, far below the 1949-2007 long-term average of 3.25%. Wage growth is completely anaemic, with virtually no inflation-adjusted growth in the past six years. Government spending is approximately 40% of GDP and the country faces a regulatory burden of 12% of GDP. Despite all of these negative factors, both the Obama administration and Federal Reserve have attempted to convince the populace that the US economy is performing at an “optimal” level.

In recent months, however, many investors and consumers alike have started to discern the blatant attempts at misinformation. Equities markets are completely flat in 2015 so far and reports in consumer confidence are consistently falling. After the announcement that the US economy grew just 1.3% in the third quarter of 2015, the Federal Reserve itself began to shed its attitude of confidence and false optimism.

In the last FOMC meeting on 28 October, Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, projected negative rates in the future. Many disregarded this as a deranged prediction from Kocherlakota, who is known for making erroneous statements on future monetary policy. On 4 November 2015, Janet Yellen, Chair of the Federal Reserve, claimed that the federal funds rates could be lowered to negative territory “if outlook worsened”. The radical fringe has suddenly become the voice of prophecy.

That same day, William C. Dudley, the President of the Federal Reserve Bank of New York, stated in an interview that “some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate,” referring to the disastrous negative interest rate policy set forth by the European Central Bank. Mario Draghi, the President of the European Central Bank, hinted that rates could be lowered further if the condition of Europe’s economic condition somehow gets even worse.

The harsh truth that has emerged since the end of the financial crisis is that expansionary monetary policy does not lead to higher economic growth in the sustainable sense. Expansion of the money supply and artificially lowering interest rates only serve to create an asset bubble, which is present in the US, Canada, and Europe. Negative interest rates will only make this conundrum even more difficult to rectify after the respective bubble bursts. Instead of focusing on short-term shortcuts that lead to economic malaise in the future, the West should begin fixing its long-term problems.

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73 thoughts on “Outlook Worsened: Negative Rates from the Federal Reserve? Really?

  1. Ned Matley November 5, 2015 / 6:36 am

    Worsened……SPX close below 2000; or perhaps more of this?

    • Tristan W. September 29, 2016 / 3:14 pm

      Nerd

  2. Wal Wayne November 5, 2015 / 6:36 am

    7 years of Obama’s job and economic growth killing policies, and despite ZERO Interest rates, record nation destroying DEBT, and Trillions in funny money and we had 1.5% growth in the 3rd Qtr despite the lowest energy prices in decades. Obama has hammered our nation, the middle class, and jobs. Obama has us on the edge of the cliff and keeps pushing, and Hillary wants to push even harder with his job killing growth killing policies.
    Now they are talking about Negative interest rates. Now there is an idea. Hey Obama I volunteer to borrow $10 billion dollars and spend it if you will pay me 5% a year and not ask for the money back. DEAL? That’s the insanity we live with in Obama’s American folks. He and the democrats are destroying us.

  3. Birdman November 5, 2015 / 6:40 am

    Obama is the biggest job killing growth killing President in history. Every jobs report that shows lower UNEMPLOYMENT makes me laugh. Under Obama the unemployment rate keeps dropping because more and more millions of American drop out of the economy onto welfare and Obamastamps and stop even trying to look for work. When Obama has force all of us to drop out we’ll have ZERO unemployment because because there will be no employment and nobody bothering to look for work. Hillary folks wants to double down on all the damage Obama has done.

  4. Jellin' with Yellen November 5, 2015 / 6:41 am

    Zach keeps getting it right on the economy. The problem with NIRP,ZIRP, QE4Million, is that of a planned economy. The Fed’s “plans” are no different than the collapsed Soviet and past Chinese failed policies. Americans have just been brainwashed errr indoctrinated to believe that the Fed is exceptional and has their back. Make no mistake that only gold, silver and farmland (and a good bicycle) is going to save you when the normalcy bias ends. I removed my bank core deposits and have slowly been converting into tangible assets.

  5. zebra1981 November 5, 2015 / 6:42 am

    The only tool the Fed has is monetary policy. I commend them for doing what they could with the only tool they have. Monetary policy is a much better brake than an accelerator.

    What was missing was fiscal policy. It was almost completely absent. With the election of a Democratic president, the Republicans suddenly remembered they were supposed to be fiscal conservatives. After standing by silently while Bush doubled the national debt, they suddenly became concerned about deficits.

    With the political makeup of Congress there is not going to be any fiscal stimulation. The road to recovery is going to be painful and very long. Long as in decades.

  6. James Patterson November 5, 2015 / 6:43 am

    The FED has STOLEN thousands of dollars from me over the last few years. I don’t have those dollars to spend. The Fed is paying banks interest to hold ‘excess’ reserves!

  7. Bring Gold November 5, 2015 / 6:43 am

    I have to admit I’m SUPER curious how regular people, in particular the elderly on fixed incomes, will react to negative rates. Something has to wake up the populace to the madness. Got gold, silver? Bitcoin if you trust it.

  8. Jeremy Fields November 5, 2015 / 6:45 am

    if, instead of slamming businesses for making money, government would stop passing more regulations and get out of the way, business capex and new hiring would resolve this dilemma. Government proves once again that it has no idea how to run an economy.

  9. Glen November 5, 2015 / 6:47 am

    There won’t be any rate hike. What will happen is that the rate has to even go down to negative territory or launching QE4. This monetary easing has been illusive right from its start and the wishes to rate hike is another illusive in this deflationary pressure environment. The Fed looks so desperate for a rate hike. It has been confusing and is becoming more confused amid flawed economic data. Though unemployment rate is low the employment quality is a big question.

  10. Zezniho November 5, 2015 / 6:47 am

    Is negative interest rate the end of savings value? Let’s consume crazily? Are we all on bureaucrat’s hands?

  11. IT GUY OF THE YEAR November 5, 2015 / 6:47 am

    Skip the NIRP, go straight to helicopter money. That is going to happen after they realize that NIRP don’t work.

  12. Nikola November 5, 2015 / 6:53 am

    Thank you Zach. Everyone needs to see this article.

    NIRP won’t work. Why don’t we look at other factors that have been dragging the economy down, like Obamacare, tax uncertainty, and even the rhetoric of the president…

  13. RubioFan1993 November 5, 2015 / 6:54 am

    They have no clue as to what they have done!!! Unjustified and unsustainable levels of stock prices encouraged by the FED and greedy stock buyers hoping to get rich at the expense of everyone else. Right now the stock market is similar to a riot where everyone is looting and ready to kill anyone that comes in they way. It’s madness and hysteria at its best. How long can this be sustained??? Zero, no, and negative interest rates are the actions of a desperate fools (Bernenke – Yellen) looking for a quick fix. Thursday and Friday’s stock market bump is classic mania!!!! America is heading down turbulent waters without paddles (decent leadership)……

  14. Jason Nelson November 5, 2015 / 7:03 am

    There will be no return to capitalism and free enterprise system as long as the Federal Reserve Board controls the economy. The Federal Reserve Act of 1913 should be repealed and America should go back to the pure gold standard. Trump is the biggest crony capitalist in America; Hillary is a socialist; and Bernie is a communist. I do not see any way this country is going to return to a free market system.

    • Jeff Rankin November 5, 2015 / 1:25 pm

      What about Rubio?

  15. Richard November 5, 2015 / 7:04 am

    This is a very easy problem to solve… Stop living off other peoples Income. You cannot achieve Growth if half the population is on some sort of Public Assistance.

  16. Roger Thornhill November 5, 2015 / 7:05 am

    I think we’ll eventually have negative interest rates here in the U.S. They’re already being introduced in a couple of countries in Europe. As for gold, I never trusted it as investment, figuring that if I ever wanted to sell it, the offering price would be lower than what I paid.

  17. Lewis Landrieu November 5, 2015 / 7:06 am

    What they are talking about is communism. If rates were negative then physical cash and precious metals would have to be illegal to own to prevent runs on the banks and to keep people from switching to barter and hoarding gold. Any country that takes away all means of savings from its people is practicing communism. If rates on people bank deposits were to go negative you can bet on revolution. The easier thing to do would be to “change the tables” where by all debt remains at current levels, but all income and prices are changed overnight to 3X the current levels. This makes the debt burden on people and governments manageable. It’s been done before.

  18. JEFF1994 November 5, 2015 / 7:06 am

    But I thought we already have inflation. The stock market says so. We have these rallies don’t we? Or is it the Plunge Protection Team buying stocks with money that the Federal Reserve keeps printing up? So if there is lack of inflation, why not send some of that printed cash our way so we can spend the money and bid up prices? Why must the Feds dump it in the stock market where it does nothing because only the rich and upper class buys stocks, not the poor or middle class. If there truly was a recovery the Feds would not even think of negative interest rates. This proves that this recovery announced by the Feds is one big lie.

  19. Dark Horse November 5, 2015 / 7:06 am

    So much for raising rates and no more QE. The Fed’s credibility is precisely where its interest rates are: deep in Yellen’s toilet.

    Once the market realizes the Fed is full of BS, the charade is up, the tide will go out, and Janet Yellen will be exposed: standing there without any swimwear. A horrid cataclysmic prospect I dread.

  20. Dr. Engals November 5, 2015 / 7:07 am

    They can pretend all they want, but in a debt based monetary system where debt grows exponentially NIRP in one form or another is inevitable.

    • Leon Yip November 5, 2015 / 10:26 am

      Yet the headline on CNBC just this morning was all about the “hawkish” FED.

  21. Henry Weller November 5, 2015 / 7:09 am

    I’m turning Japanese, I think I’m turning Japanese, I really think so!

  22. Kaiser Sofa November 5, 2015 / 7:09 am

    cool…

    i think i’ll liquidate some Silver and take out a CD with BOFA…

  23. Mark Linklater November 5, 2015 / 7:10 am

    Janet Yellen, from February 22, 2010:

    “If it were positive to take interest rates into negative territory I would be voting for that,” she told reporters after the speech.

  24. VWPaul November 5, 2015 / 7:11 am

    Adjusted for inflation we have been in negative rates for years now. The second we went below the inflation rate of 3%.

    We are measuring with a variable.

  25. Longitude95 November 5, 2015 / 7:12 am

    And nothing says NIRP like declining PM prices LOL.

    • RubioFan1993 November 5, 2015 / 11:13 am

      It’s seriously insane. A testament to people’s ignorance and inability to connect dots. In reaction to the mere mention of NIRP by Yellen, gold should be soaring, through the roof.

      At least Vega is trying to inform us about what’s going on, but only 1 million people have read his stuff. Not nearly enough.

  26. DosZap November 5, 2015 / 7:18 am

    She can keep babbling on all she wants and say they are going to raise rates, then go to NIRP…..fact is they won’t change shit come December.

    Her actions remind me of the mindset of someone with Bipolar Syndrome.

  27. JarsonCondy November 5, 2015 / 7:26 am

    What a criminal, we already have negative rates. With everything rigged there is no way to preserve your wealth, all according to the plan to bring this country to it’s knees, with no resistance.

  28. Cheek Wizard November 5, 2015 / 7:33 am

    +1000 for the truth…

    Standard Disclaimer: In my world, which I admit is a bit twisted and dark sometimetimes, children whose future was stolen by Bernanke, Yellen, and Obama would be lining up to swing sticks at their rotting corpses as they swayed gently in the breeze from the ropes around their necks…

  29. c5then November 5, 2015 / 8:14 am

    This would be negative interest to borrow from the FED. Therefore no one would. Therefore all the bizarre Market action would disappear and the Markets would drop.
    This would have little effect on the actual economy similar to the actions the FED has taken in the last couple of years have had little effect on the actual economy.
    It would have a major negative impact on the markets though and that has become the proxy for the “economy” in the last number of years…

  30. Bank Buster November 5, 2015 / 8:29 am

    This question is for all the experienced market vets out there: If the fed raises, do the other central banks around the world tend to follow suit and will stop cutting rates? I know these are unprecedented times but is that what typically happens?

  31. Tom Lanks November 5, 2015 / 8:37 am

    If we are facing de-inflation, a notion seldom seen here in the US, That would scare the “regulators to their core. Way too much inventories at the wholesale and far too much grain like corn in storage. That will drop the prices to below manufactured costs. If that becomes a trend we then are looking at negative profits and massive layoffs. Just the talk of below zero interest could be an indicator that the Fed is thinking along those lines. Who do you want to believe? China? Europe? Our government? What is in your safe?

  32. Chad November 5, 2015 / 8:37 am

    Since the Federal Reserve embarked on their QE’s and ZIRP they haven’t come close to generating the economic growth their own models have predicted. Most of their policies have benefited those who are already well off at the expense of savers and retirees.

    And now we are going to allow a group of Keynesian academics to experiment with a totally new way to screw up the economy. It is time for Congress to revisit the Fed’s proper role.

  33. Thomas Frietas November 5, 2015 / 8:53 am

    Negative interest rates have been a reality in the United States for a few years now. Many United States Treasury (UST) securities have had real negative interest rates, i.e. the rate of inflation is higher than the rate of return. Currently a 12 month UST Bill pays 0.31%, well below the annual rate of inflation in the US. So those holding such a Bill are actually losing money, i.e. earning negative Real Interest Rates

  34. purplegeek November 5, 2015 / 9:28 am

    Barack Yellen says negative rates? How the narrative has changed in a few months.

  35. rj 49 November 5, 2015 / 10:37 am

    I WANT EVERYONE OF YOU FEDERAL RESERVE FAGS TO STOP FUCKING UP THE ECONOMY GOD DAMMIT FUCCKKKKKKKKK!

    WE NEED TRUMP TO LYNCH THESE MOTHERFUCKERS BUT HE PROBABLY WON’T WIN SO WE NEED RUBIO BECAUSE HE WILL AT LEAST CRACK THE WHIP ON THOSE WHORES!

  36. Lip30 November 5, 2015 / 12:46 pm

    So. Does negative interest rates mean the government would actually pay a dividend to borrow money? Sounds like a really stupid idea to me. Who would pay this dividend? The working class that pays most of the taxes? I guess this kind of thinking is normal for government employees who are too stupid to hold a job in the private sector.

    • Bill November 5, 2015 / 1:09 pm

      I think it means that the Fed Reserve would charge banks a fee to park their money. This would supposedly incent the banks to lend it (generating income) rather than store it. This would supposedly cause business and consumer interest rates to fall and credit requirements to be loosened. I am not a financial pro so I could be wrong…

  37. Starbuck November 5, 2015 / 1:42 pm

    Denmark went -0.2 in 2012. Sweden went -0.1 earlier this year. No real + or – impacts but both relatively tiny economies. However, in the US, many things to think about.

    Moar bank borrowing.

    Fee crazy banks (or as hep cat Obama says “cray”) and guaranteed those would never disappear after rates resume upward. See, the banks aren’t being compensated for risk through the Fed, so hey Mr. Consumer – YOU COMPENSATE US FOR RISK NOW.

    A lot of hard assets will look pretty safe compared to excessive fees on deposits.

    Nothing like a little chaos to get moar money to the banks.

    MISSION ACCOMPLISHED, EH YELLEN?

    • Kaservak November 5, 2015 / 1:52 pm

      I think Denmark and Sweden never made the small bank customer pay those rates on (small) deposits though, they still got 0.01% yay lets party

  38. JBleaux28 November 6, 2015 / 1:15 am

    The Ft. Smith National Historical Site in Arkansas has a gallows which was once used to hang as many as six criminals at a time. Any six of the Fed “doves” would look good up there.

  39. Jo Plumber November 6, 2015 / 5:54 am

    So, if $100 in the bank becomes $98, isn’t it just semantics since we already have that situation due to the fed printing trillions of new dollars on top of the gov’t borrowing trillions more?

    What’s the difference between losing $2 in the bank & losing $2 of purchasing power @ the grocery store? none

  40. Matt Lanza November 6, 2015 / 5:54 am

    Seems to me that’s the only option they have left since we are probably not far off from the next recession and now they have painted themselves into a corner with zero %. Of course, that still won’t work. Those that have no money in banks well, have no money in banks. People like me who have ‘some’ would simply withdraw it and put it in a safe. Better to collect zero interest in a safe then have a bank charge me for the privilege of using my money.

  41. DonoMann November 6, 2015 / 5:56 am

    Negative rates means the banks charge you interest for your savings account or CDs? But the banks pays you interest for borrowing their money? That’s fantastic!

    • 830 November 6, 2015 / 9:21 am

      Donov Mann, you made me laugh:
      “But the banks pays you interest for borrowing their money? That’s fantastic!”
      If only it were so.
      Of course to be fair, we should insist that the Fed make it so!
      After all what is good for the goose is good for…
      When we deposit our money we are indeed lending to the bank or at least through them…
      So if we get dinged for negative interest in that, the banks should get dinged when they “make a deposit to us”.
      Hilarious. Except the Fed is not amused by your camping out for weeks on end, in front of their fine building in your tent, with your sign insisting on equal treatment under the law.

  42. James Hayman the 3rd November 6, 2015 / 5:57 am

    Negative interest rates = desperation. If money is free, then why not just print economic success and be done with it. Low interest rates = deflation – simply because capital is wasted keeping inefficient business in business and over producing to the detriment of many good businesses. In the end, people will buy gold to protect against negative interest rates and the fed will lose control. It is a dead end street from which there is no return.

  43. Ted Bear November 6, 2015 / 5:58 am

    So let us take this to its logical (or in this case illogical) conclusion: If someone saved $1000 in the bank, if say rates go negative to -.5%, the saver will be charged $5 by them. If someone saved $10000, the saver will be charged $50. And so they will be charged more the higher savings they have right?
    This looks like a great way to punish people who believe in savings and save more than others who don’t save anything and are simply in debt. Cool, lets all dive into the deep end of the swimming pool of debt together and get paid for it now! Awesome. I am sure this will put the country back on the right track.

  44. Blair Dehuff November 6, 2015 / 5:58 am

    The FED hasn’t cared about savers for the last 7 years and they won’t start now. They’re only overriding concern is to keep the their ZIRP / QE house of cards from crumbling. They’ve only proven that once you go with ZIRP this long there’s no turning back. The next black swan that comes along will justify them to go negative-ZIRP, and they will say it’s only temporary. Like many years will THAT be?

    • Jason Ho November 6, 2015 / 9:27 am

      The Fed hates savers. They want us to spend our money on useless things to drive “growth” in our consumer based economy.

  45. John Sloan November 6, 2015 / 5:59 am

    Zach has reviewed his Economics 101 textbooks. Some of the Federal Reserve Governors haven’t.

    Labor rates could be improved quickly with three changes in US policy: Enforce existing immigration laws; amend Dodd-Frank so that banks want to lend to small businesses at current low rates, and finally, erase 90% of the current Administrations anti-business regulations.

    Trump 2016!

  46. John Martini November 6, 2015 / 6:00 am

    Look at the bright side:

    The Fed is going to destroy the US economy right in time for the presidential election, meaning the Democrats can’t win!

  47. AB Bricker November 6, 2015 / 6:02 am

    No student of Economics here, but if the Fed is as duplicitous as some folks say, then implementing negative rates would be an ideal way to stimulate the economy – on the backs of savers. Negative rates signify an erosion of principal. Savers would then allocate money to other asset classes. The Bank of Sealy Posturepedic would be less ludicrous than some might now imagine. Savers eschew the volatility of the stock market in favor of safety. If the latter is (once again) artificially inflated, then savers rush in at a market top, only to ride the latest wave downward .

  48. Alex Hanson November 6, 2015 / 6:04 am

    It is a great idea. This way they can charge you a quarter of a %, to hold your money. Sounds like a great idea to have the banks make money!

  49. Schiff94 November 6, 2015 / 6:04 am

    The “FED” is the central bank the founders feared. They manipulate the banking, investing and debt markets according to the political winds.

    • Peggers+ November 6, 2015 / 8:56 am

      As the U.S. central bank, the Fed plays several important roles in the U.S. economy that are not always visible to the public, though they directly and indirectly affect participants in many financial transactions—which means everyone at some point or another! Occasionally, however, the roles of the Fed become more obvious.

      • schiff94 November 6, 2015 / 9:15 am

        The financial crisis of not long ago has not surprisingly generated a great deal of anguish within the electorate. Americans were and continue to be a skeptical lot when it comes to the competence of the various federal bureaucracies which dot the Washington, DC landscape. Despite their skepticism about the competence of regulators, they were still disappointed when those empowered to oversee our financial system were seemingly caught unware by a banking collapse.

        Rightly or wrongly, the US Federal Reserve has become one of the biggest targets within the financial bureaucracy when it comes to public distrust, and as a result, its ongoing purpose is increasingly being questioned. Some in the political class seek greater congressional oversight of our central bank, while others, including Rep. Ron Paul, would like the Fed to be abolished altogether.

        The Fed’s greatly reduced reputation naturally raises questions about why we have a central bank to begin with. Although the Fed presently engages in a wide array of activities, its adherents generally support its continued existence on three grounds: They expect it to manage inflation through manipulation of short-term interest rates; to issue a currency which facilitates exchange; and, most important, they see an essential role as “lender of last resort” to banks during periods of tight credit.

        These Fed functions seem compelling at first glance, but given a careful rethink, it becomes apparent that much of what it does is either ineffective or superfluous, and could be handled much more skillfully outside this government-chartered monopoly. Contrary to the broadly held view that we need the Federal Reserve, logic says we’d be much better off absent a central bank that economist George Selgin terms “fundamentally destabilizing.”

        • Peggers+ November 6, 2015 / 9:51 am

          Although such events occur rarely, the Fed’s actions have played a very important role stabilizing the economic and financial system following various shocks to the economy:

          After the failure of Continental Illinois National Bank, one of the country’s biggest banks, in 1984, the Fed prevented smaller banks with deposits at the large institution from being jeopardized by temporarily loaning $5 billion to Continental Illinois.

          During the stock market crash of 1987, when the market plunged more than 20 percent, the Fed provided liquidity to help stabilize financial markets.

          Following the default of the Russian ruble in 1998, which caused the Russian government to halt payments on its foreign debt, the Fed lowered short-term interest rates to help alleviate turbulence caused to the U.S. and international economies.

          More recently, the financial system as a whole faced significant disruptions after the September 11, 2001, terrorist attacks in New York and Washington D.C. While this tragic day remains poignant in our memories for reasons beyond economics, the impact on the financial system serves to illustrate the Federal Reserve’s critical role keeping the U.S. financial and economic systems open and operating.

          In the beginning

          When the Fed was created by Congress in 1913, its primary purpose was to ensure and safeguard against bank “panics,” episodes when depositors raced to their banks to withdraw their funds because they feared that the bank might become insolvent. One of the responsibilities of the new central bank was to act as “lender of last resort” to banks during difficult financial times and/or problems with liquidity, or availability of money. The Fed’s responsibilities have since broadened to fostering a sound banking and economic system through the avenues of:

          Cash, check processing, and electronic transfer services,
          Banking regulation and supervision, and
          Monetary policy.
          As you pointed out, the U.S. economy relies on market forces to provide price signals that help producers and consumers adjust the supply and demand for goods and services. Ultimately, we believe this process leads to the efficient allocation of resources—they are directed to where they are most highly valued. The United States is fortunate to have a relatively well functioning and stable economic and financial system. However, when rare market disturbances or financial shocks occur, this stability may no longer be taken for granted and the importance of a central bank that can respond to the situation becomes very apparent.

          Market disturbances

          To see how a so-called “market disturbance” could affect you directly, try asking yourself: What would happen if you weren’t able to access the cash in your banking account? What if you could not access your funds through a local ATM, or you couldn’t cash a check because the bank was short of funds? How would that affect you and your family, especially if you needed to purchase food or other necessities right away? How would businesses respond if they were unable to access their funds to pay for supplies or to receive payments from their customers? Now imagine what would happen if such an event affected a significant part of the U.S. economy and how it might disrupt commerce and the financial system.

          Fed actions to support the financial system

          On September 11, the Federal Reserve took action to retain public confidence in the financial system when it issued a statement that the Fed was “open and operating”—given the magnitude of the disruptions it is uncertain whether a system without a flexible central bank would have been able to respond to the extent that the U.S. economy did. The Fed acted within its three primary functions:

          Keeping the Payments System running. For example, nationally, the Fed ensured the check-processing system was operational by continuing to make payments to banks receiving funds, even though the Fed was unable to collect from the banks making the payments because the air transport system used to move checks was shut down. Locally, in New York City the Fed delivered more than 425 million dollars in cash to banks located near the attacks so that they would have funds in the event that they faced increased precautionary demand for cash.

          Acting within its Banking Supervision and Regulation role. The Fed made it easier for banks to obtain overnight loans through its discount window, and thus have enough cash on hand for their customers. It accomplished this by lending a record 46 billion dollars to banks through the discount window on September 12 (compared to a 2001 daily average of only 54 million!).
          Using Monetary Policy and the target federal funds interest rate to provide liquidity to the banking system:

          The Federal Open Market Committee (FOMC) held an emergency meeting on September 17 to lower the overnight fed funds rate one-half of a percentage point, to provide liquidity to the banking system and avoid shortages or liquidity problems that could disrupt commerce.

          The Fed pumped cash into the financial system. The Fed bought $38 billion, 70 billion, and 81 billion in U.S. Treasury securities on September 12, 13, and 14, respectively, infusing the economy with cash—on a normal day in 2001, Fed purchases of Treasury securities ranged from only $2 to 8 billion.

          • Schiff94 November 6, 2015 / 10:25 am

            If not banking stability, then what? If it’s agreed then that the Fed’s initial purpose wasn’t as elegant or innocent as is often assumed, it can then be asked whether it’s doing a good job in other areas where it’s deemed essential.

            The control of inflation is a good place to start. But to judge the Fed’s inflation fighting skills, it’s useful to briefly discuss definitions of the inflation problem. The late Jude Wanniski defined inflation as a “decline in the monetary standard,” or more clearly, a decline in the value of the dollar.

            This is an important distinction because it can’t be stressed enough that today’s Fed views inflation in an entirely different way. For evidence, we need only reference a 2008 speech by outgoing Fed vice chairman Donald Kohn: “A model in the Phillips curve tradition remains at the core of how most academic researchers and policymakers – including this one – think about fluctuations in inflation.” Kohn went on to note that “bringing overall inflation immediately back to the low rate consistent with price stability could be associated with a much higher rate of unemployment for a short time.”

            The Fed divines what it supposes to be inflationary pressures through rates of unemployment and capacity utilization within US factories, and it then manipulates the short term interest rate as a way of moderating them. If Kohn et al are to be believed, when an economy grows too much such that labor and capacity are in short supply, prices rise and there’s an inflationary event.

            The obvious problem here is that neither capacity nor labor are finite even within the US. But even if they were, US companies most definitely have access to the world’s supply of labor and manufacturing capacity. In short, the Fed’s view of inflation misrepresents what is always a monetary phenomenon. What the Fed presumes to be the cause of rising prices quite simply cannot be that, given both the dynamic and global nature of labor and capacity.

            When US central bankers manipulate the short rate of interest, they do not do so to control the value of the dollar. So here too the Fed’s interest rate policies have nothing to do with inflation. Worse, the manipulations are in and of themselves economically destabilizing in that their impact on rates across the yield curve drive economic actors to “reschedule” economic growth around the Fed’s directional control of rates. Contrary to popular belief, the Fed does not manage inflation through the rate mechanism, and it also doesn’t stimulate economic growth so much as it just moves it around.

            So if we define inflation traditionally as a monetary probem-specifically as a decline in the market value of money – the Fed has failed impressively. When the Federal Reserve Act passed in 1913, a dollar purchased 1/20th of an ounce of gold, while today it purchases 1/1350th.

            It should be noted here that the dollar’s value is the preserve of the US Treasury as several Wainwright Economics publications have made plain. That said, if inflation is one metric by which we should judge our central bank, its role as an inflation fighter would not be a reason to keep it, as evidenced by the dollar’s staggering decline since the Fed came into existence.

  50. TikiList November 6, 2015 / 6:10 am

    The Fed has lost all credibility.
    Let the market set the rate, not a centralized power.

  51. Rick Schaja November 6, 2015 / 6:10 am

    I don’t know about anyone else but do you honestly want to pay a bank to just hold your money for you? Now imagine a lot of people thinking the same thing and not want to be taken for chumps in that way. Would things turn into bank runs, sprints or marathons? Either way, the mattress is looking mighty fine.

  52. Steve Charles November 6, 2015 / 6:11 am

    Once again the Fed shows its Intellectual Bankruptcy.
    Zirp has not worked, so it is considering extending the Zirp principle farther along the axis to Nirp.

    The Fed constantly wishes to interfere with Supply and Demand and that’s where it has ruined the economy.

    Let markets reach their own Supply/Demand equilibrium and although the growth won’t be strong for a while it will heal and the economy will normalise.

    As long as the Fed maintains this continuous tinkering the markets will be false and the economy will not recover.
    THE FED IS A HUGE FRAUD.

  53. Maxander D20 November 6, 2015 / 6:11 am

    Cashing out of US equities makes sense now as US equities have run up a lot from last 2 weeks without any steam left & lower earnings season already making US equities priced up. US markets may correct sharply ahead. On Crude oil, US crude oil production likely to drop towards some 5 mn barrels per day from current close to 9.2 mn barrels per day. in next 3-5 years.

  54. Hans Viirlaid November 6, 2015 / 6:13 am

    This idea of a negative interest rate will not work because it does not address the real problem.
    The problem today is debt that is too big to properly be serviced while still maintaining some reasonable rate of economic growth. This is a worldwide issue.
    A negative rate on savings will not even encourage the spending that it is intended to do. It will make people more fearful and make them try to avoid losing what they have. It will create the price deflation the Fed wants to avoid by making people hoard more, not spend more, just like in Japan for the last 25 years.
    This is just another silly idea from academicians to solve a problem of their own making.
    What the Fed has done, always of course, with good intentions, is to encourage the Debt Mountain to get higher and higher with ALL of their past policies. Now they don’t have any more ideas to make people take on even more debt.
    The preposterous idea was always to generate a self-sustaining economic recovery. But this is a bankrupt and bankrupting, hubristic, PhD/ivory tower academic theory.
    The Fed in the past, over many such cycles of ‘stimulation’, had seemingly-only, managed to defer recessions.
    But over time, to accomplish such deferment, debt was increased to levels worldwide, for individuals, companies, and governments that are completely unsustainable.
    Why the Fed does not recognize that this is the reason for lack of economic growth, I do not know.
    This debt is a millstone for us all and for all our economies.
    Any policy that does not effectively address this millstone is bound to fail.
    Why does the Fed think that it can still ‘stimulate’ a new recovery to start with more of its easy money policies?
    In this case not with easy money but with coercion.
    With a form of Forced Spending virtually at the pointing of a gun with this negative rates’ policy?
    We are not in that world any longer that is willing to take on more debt.
    Once you reach the zero-bound, the economic and financial system is trying to tell the Fed something.
    And that something is that the system is operating under a debt load that it wants to relieve itself of before it will grow again in the way it has in the past.
    But no one at the Fed is listening to that message.

  55. Angry Man! November 6, 2015 / 6:13 am

    Actually the Fed is already stealing your money. If inflation is 2% and you get 0% interest, this amounts to the EXACT same thing as stealing 2% of your money every year, only most people are too dumb to realize this, and so they can get away with it with impunity.

    • Hans Viirlaid November 6, 2015 / 9:45 am

      The Fed probably thinks 2% negative rate is no big deal.
      They have been using the policy of “Financial Repression” for the last 15 years and they don’t yet see anyone carrying signs against THAT policy in front of their building in Washington.

  56. Aaron Cohn November 6, 2015 / 6:14 am

    If they do this, you’ll be very happy to have physical gold/silver in your possession. Clearly, they would also have to implement measures to keep you from removing your money from the banking system to avoid the negative rates.

  57. Daniel Brockman November 6, 2015 / 8:43 am

    Consumer demand won’t respond to negative interest rates. People who have money in bank accounts will remove the money from their bank accounts and buy stocks with it. That’s just fine for very rich people. But lower interest rates don’t enable the other people to buy groceries and fuel.

  58. Ken Blaze November 6, 2015 / 12:09 pm

    Is there no end to the hubris of these central planners? They already have destroyed the retirement hopes of fixed-income dependent seniors, and punished savers for close to a decade. This won’t end well at all.

  59. Tom Topar November 6, 2015 / 1:34 pm

    Our current administration is Democratic. Spend beyond our means and share with those who don’t contribute for votes. We are headed for a depression.
    It started with Bill Clinton “democrat” who wanted everyone to have a home without the large downpayment!
    Hence lack of hard work.
    We need Marco, who can say that the budget needs to be lowered and find a way for savers to prosper..

  60. ThatOneGuyJosh October 10, 2016 / 2:47 pm

    Bro You need to chill

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