Will the US deploy negative interest-rates?

On Saturday economists  gathered to listen to the former Chair of the US Federal Reserve Ben Bernanke speak on monetary policy in San Diego. This is because those who used to run the Federal Reserve can say things the present incumbent cannot. So let me get straight to the crux of the matter.

The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space; and because entirely ruling out negative short rates, by creating an effective floor for long-term rates as well, could limit the Fed’s future ability to reduce longer-term rates by QE or other means.

It is no great surprise to see a central banker suggesting that the truth will be withheld. But let us note that he is talking about “policy space” in a situation described by the New York Times like this.

While the economy has recovered and unemployment has fallen to a 50-year low, interest rates have not returned to precrisis levels. Currently, the policy interest rate is set at 1.5 percent to 1.75 percent, leaving far less room to cut in the next crisis.

The apparent need for ever lower interest-rates looks ever more like an addiction of some sort for these central planners. Although as ever they are try to claim that it has in fact been forced upon them.

Since the 1980s, interest rates around the world have trended downward, reflecting lower inflation, demographic and technological forces that have increased desired global saving relative to desired investment, and other factors.

As we so often find the truth is merged with more dubious implications. Yes interest-rates and bond yields did trend lower and let me add something Ben did not say. There were economic gains from this period as for example I remember  mortgage rates in the UK being in double-digits. Also higher rates of inflation caused economic problems and it is easy to forget it caused a lot of problems back then. Younger readers probably find the concept of wage-price spirals as something almost unreal but they were very real back then. Yet Ben seems to want to put a smokescreen over this.

Another way to gain policy space is to increase the Fed’s inflation target, which would eventually raise the nominal neutral interest rate as well.

Curious as they used to tell us interest-rates drove inflation, now they are trying to claim it is the other way around! Are people allowed to get away with this sort of thing in other spheres?

Is there a neutral interest-rate?

Ben seems to think so.

The neutral interest rate is the interest rate consistent with full employment and inflation at target in the long run.  On average, at the neutral interest rate monetary policy is neither expansionary nor contractionary. Most current estimates of the nominal neutral rate for the United States are in the range of 2-3 percent.

The first sentence is ridden with more holes than a Swiss cheese which is quite an achievement considering its brevity. If we ever thought that we were sure what full employment is/was the credit crunch era has hit that for six ( for those who do not follow cricket to get 6 the ball is hit out of the playing area). For example the unemployment rate in Japan is a mere 2.2% so well below “full” but there is essentially no real wage growth rather than it surging as economics 101 text books would suggest. Putting it another way in spite of what is apparently more than full employment real wages may well have ended 2019 exactly where they were in 2015.

This is an important point as it was a foundation of economic theory as the “output gap” concept shifted from output (GDP) to the labour market when they did not get the answers they wanted. Only for the labour market to torpedo the concept and as you can see above it was not just one torpedo as it fired a full spread. Yet so many Ivory Towers persist with things accurately described by Ivan van Dahl.

Please tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high?

Quantitative Easing

Ben is rather keen on this but then as he did so much of it he has little choice in the matter.

Quantitative easing works through two principal channels: by reducing the net supply of longer-term assets, which increases their prices and lower their yields; and by signaling policymakers’ intention to keep short rates low for an extended period. Both channels helped ease financial conditions in the post-crisis era.

Could there be a more biased observer? I also note that there seems to be a titbit thrown in for politicians.

The risk of capital losses on the Fed’s portfolio was never high, but in the event, over the past decade the Fed has remitted more than $800 billion in profits to the Treasury, triple the pre-crisis rate.

A nice gift except and feel free to correct me if I am wrong there is still around US $4 trillion of QE out there. So how can the risk of losses be in the past tense with “was”? It is one of the confidence tricks of out era that establishments have been able to borrow off themselves and then declare a profit on it hasn’t it?

Ben seems to have an issue here though. So by buying trillions of something you increase the supply?

and increases the supply of safe, liquid assets.

Forward Guidance

I do sometimes wonder if this is some form of deep satire Monty Python style.

 Forward guidance helps the public understand how policymakers will respond to changes in the economic outlook and allows policymakers to commit to “lower-for-longer” rate policies. Such policies, by convincing market participants that policymakers will delay rate increases even as the economy strengthens, can help to ease financial conditions and provide economic stimulus today.

Another way of looking at it is that it has been and indeed is an ego trip. The  majority of the population will not know what it is and in the case of my country that is for the best as the Bank of England misled by promising interest-rate rises and then cutting them. Sadly some did seem to listen as more fixed-rate mortgages were incepted just before they got cheaper. So we see that if we return to the real world the track record of Forward Guidance makes people less and not more likely to listen to it. After all who expects and sustained rises in interest-rates anyway?


These speeches are useful as they give us a guide to what central bankers are really thinking. It does not matter if you consider them to be pack animals or like the large Amoeba that tries to eat the Starship Enterprise in an early episode of Star Trek as the result is the same. This will be what they in general think.

When the nominal neutral rate is in the range of 2-3 percent, then the simulations suggest that this combination of new policy tools can provide the equivalent of 3 percentage points of additional policy space; that is, with the help of QE and forward guidance, policy performs about as well as traditional policies would when the nominal neutral rate is 5-6 percent. In the simulations, the 3 percentage point increase in policy space largely offsets the effects of the zero lower bound on short-term rates.

Actually if we look at the middle-section “traditional policies” did not work but I guess he is hoping no-one will point that out. If they did we would not be where we are! Also you may not that as I have often found myself pointing out why do we always need more of the same!

Still if you believe the research of the Bank of England interest-rates have been falling for centuries. Does this mean that to coin a phrase they have been doing “God’s work” in the credit crunch era?

global real rates have shown a
persistent downward trend over the past five centuries, declining within a corridor of between -0.9 (safe
asset provider basis) and -1.59 basis points (global basis) per annum, with the former displaying a
continuous decline since the deep monetary crises of the late medieval “Bullion Famine”. This downward
trend has persisted throughout the historical gold, silver, mixed bullion, and fiat monetary regimes, is
visible across various asset classes, and long preceded the emergence of modern central banks.

The catch is that if you are saying events have driven things people might start to wonder what your purpose it at all?



21 thoughts on “Will the US deploy negative interest-rates?

  1. Without getting into complex arguments on economic theories, what I have learned over the years is one normally expects higher interest rates with higher inflation, and in a world where inflation seems to be cooling one would expect lower interest rates.

    So in answer to the question on todays blog if the US growth slows I would think the US may have to think about negative rates like other economies have had to do.

    One of the main worries around the world is the climate change and the only way to reverse that is to change our habits and buy less than we have in the past and that can only mean less growth, which in itself suggests more QE will be needed world wide and negative interest rates may become more the norm.

    • sorry , reverse climate change ? you mean from hotter to colder ?

      you wish is my command!

      ( you’ll just have to wait about 10,000 years – ocean mixing will do the job ….. sorry , you want to do that over the next 50-100 years ? tricky* …..)


      * anyone got any ideas on what to do with China and sub Saharan Africa?

      what do you think their response will be?

      • forbin,

        You have a point but the scientists think a one degree is one of the reasons why there have been so many floods and it may take only a 1 degree change to reverse.

        However I also accept we are consuming too much and that is damaging the environment.

        Whether it be global warming and environmental waste most people accept there has to be change and the change will mean less consumerism and slower growth

        I am just a humble being that accepts the serious problems we have to take account of and what the UK does will make little difference when China is causing so much pollution and the word relies upon growth as an addiction.

        The truth is no one wants their circumstances to get worse, no one really wants to manage on less than they have already got.

        • the problem is indeed a difficult one

          it may take only a 1 degree change to reverse. but how?

          at the current rate humans are adding about 25ppm CO2 per decade , the rate increased around 2000 from 15ppm to 25ppm when China joined the WTO and industrialized. Africa is likely to add about 2 Billion consumers in the coming decades and will also like to industrialize, seriously I doubt there will be enough coal , gas and oil for that to materialize yet alone any disruption from climate changes ( such as the loss of land ice from Greenland and Antarctica , etc)

          but to reverse it and go back to say 350ppm ( 350 org) isn’t going to happen by planting a lot of trees ( and you’ll have to compensate for the Amazon losses too ) or any other scheme because you’ll need a lot of energy and resource to do that.

          dropping the use of plastic bags and straws is so feeble as to be a sick joke. no , really , it’ s a salve for some political consciences .

          for economics of this as this is an economic forum ,a lot of plans ( like the Donuts theory ) require a level of control that is ,frankly , authoritarian and harsh. Look up and read the first chapters of Harry Harrison’s Homeworld Sci-Fi trilogy . or Dune .

          Of course with the current events things are looking bright , with which no amount of Oakley protection will suffice 😉


    • Climate change is a fraud. Not one run of the new CMIP6 models has shown room for a human fingerprint, far less footprint, in climate change.
      Furthermore, there are natural explanations for ALL extreme weather which have nowt to do with burning fossil fuels.

      • for the reader I believe Buzzing is referring to Charney sensitivity calculations

        they will cause some discomfort to a certain Swedish young adult…..


      • Thanks for that. Always good to hear from someone that has solved a century-old problem without any of that tedious checking of data or explaining basic physics. Life must just be a breeze for you – just look any issue up on some random nutter’s website and, hey-presto – problem solved!

        Actually, we can see the human footprint almost everywhere we look in climate change, starting with albedo changes and running through to the massive holes punched in the ocean’s foodwebs, causing equally massive shifts in how oxygen and other gasses are dissolved and trapped . And that’s before we look at atmospheric composition itself.

        7 Billion people can do a lot of damage without even trying. The flat-earthers and other deniers struggle to explain exactly how so much could be done to the planet’s ecosystems and NOT have real effects. Magic, I suppose.

        The claim about CMIP6 is a simple lie. In fact it showed the reverse; that increasing carbon emissions are indeed driving increases in the rate of warming as predicted by climate models for the last 50 years. Indeed, it has shown how good even the early warnings were. Unfortunately, they were largely ignored.

        Lucky we have therrawbuzzin here to tell us it’s all fine.

  2. Hello Shaun,

    re ” global real rates have shown a persistent downward trend over the past five centuries, ”

    their book keeping mush be good …… Vellum to digital bits….

    I’d state the current economics is based on plenty , that is since the mid 17th century and the use of fossil fuels this time. look up Athens democracy , base mainly I suggest on the wealth of their silver mines ( and the slaves who died to mine it ) .

    interesting times


    • Hi Forbin

      There were advanced civilisations in the past as for example there was a good BBC Four documentary series on the silk road a year or two back which highlighted various people’s and merchants in what we would now call “the stans”. But some of them disappeared ( one was wiped out by Stalin nearly entirely) so how so we know and that is before we get to the less advanced phases. For example there was more than a century of the Dark Ages still to go in 1311 and they got that moniker for more than the weather.

      But whilst it is research that is also convenient for the central banking fraternity it does throw up some titbits I think.

  3. Hello Shaun,

    re : When the nominal neutral rate is in the range of 2-3 percent, then the simulations suggest …

    indeed , it is said that in theory that practice and theory are the same, in practice they are not – yogi

    Despite the glaring obvious fact that the theory is bunk , they continue to follow it ……. well as George Carlin once said ” shows how much sh!t they have left on the shelf…”


    • Hi Forbin

      After intervening on the scale that they have central bankers are afraid people will discover why they really did it. So they have set up a type of distraction and deflection effort which so many just copy and paste.

  4. Anyone that listens to what these liars and charlatans say, expecting it to happen deserves all they get IMHO. They lie repeatedly and get away with it, the press and media never call them out on it, and politicians will hardly threaten the institution that keeps giving them almost free money to buy future votes will they?
    Bernanke has repeatedly lied to congress when denying the Fed is monetising US government debt, but that is exactly what they are doing but by doing it one step removed from full blown monetisation(Fed buys government bonds directly with computer generated credit) it does so by using the primary dealers as intermediaries and buys it off them, sometimes as recently as just a few days after they have bought it, giving them a nice multi million dollar risk free profit by front running their purchase.
    Now to me that is no different to outright monetisation, but nowhere have I seen this practice questioned, and yet people think these con men are somehow going to steer us out of this mess!
    They only have two tools -1.lower interest rates and 2. print money-nothing else, so if it means going negative then that is exactly what will happen, as pointed out on here before Dr Michael Hudson thinks they might go as low as minus 25% before ti all collapses,and that will be at the same time as QE goes nuclear, we are talking hundreds of trillions each time and doubling, quintupling more and more each time, what do you think fiat currencies, savings, pensions and your wages will be worth then?

    More importantly – who will stop them?

  5. Great blog as usual, Shaun.
    There seems to be an inflation in expert calls for hiking the target rate of inflation. Olivier Blanchard spoke of raising the target rate to 4%. Now, in Bernanke’s speech he models what would happen if it was 5%. Once he is out as Governor of the Bank of England, will Carney, always good at spotting a trend, be calling for 7%?
    After I read your blog, I read Bernanke’s whole speech, and while he finally doesn’t recommend the US Fed going to a higher target rate, at least not just yet, he falls just short of it, and his analysis should not go unchallenged. The case for keeping a low target rate of inflation has never been better expressed than by Bank of Canada Governor Gordon Thiessen, who, ironically enough, got the job because he was willing to accept a 2% target rate of inflation for the period after 1995, and his predecessor, John Crow, wanted it reduced to at least 1.5%:
    “…[I]t is important to remember that the achievement of price stability is likely to lead to a lessening in the amplitude of business cycle fluctuations. In the post-war period, deep recessions (of the sort that might, in extreme cases, call for negative real rates) have typically been preceded by periods of strong inflation pressures. These pressures resulted in significant economic distortions, which, in turn, affected the depth of the subsequent downturn. In the absence of such inflationary distortions, the downturns are likely to be much milder. Hence, there is less likelihood that a period of negative real interest rates would ever be called for. [This will be even more the case if every country had a central bank with a low target rates of inflation, or a currency pegs to the currency of a country that had one.]
    “Moreover, while nominal short-term interest rates cannot be less than zero [this is of course, no longer true], it is worth underlining that a near-zero nominal rate will still imply a real interest rate that is appreciably below its equilibrium value and will provide considerable stimulus to the economy.
    “Finally, in a small open economy with a flexible exchange rate regime, monetary conditions can become easier as a result of both interest rate and exchange rate movements. Even if there were only limited easing possible via the interest rate, there could still be a sufficient adjustment of monetary conditions to support a recovery and avoid having inflation persistently below the target range. [The US is not such a small open economy, but the stimulus generated through the exchange rate in the case of a recession would still be substantial.]”
    Oddly, the US PCEPI, because of its formula, has almost no upper level substitution bias, the only target inflation indicator of a G7 country this is true of, so arguably, the US already has the highest “true” target inflation rate of any country.
    I do find it ironic that Bernanke would institute the PCEPI as the inflation indicator of the US Fed in 2012, but now he takes the core PCEPI as his inflation measure in this paper. Has he changed his mind, or did he let his colleagues on the FOMC prevail upon his better judgement eight years ago?

    • Hi Andrew and thank you

      If I may start with your last point then central bankers do display what it we are being polite might be called “intellectual flexibility” on inflation targets or if less polite cherry picking.

      Moving to the main issue the attempts to raise the inflation target are simply trying to pull the wool over people’s eyes. They will claim to have made them better off by making things more expensive! The reality is that with so many economic indicators heading lower the inflation target should do so too and/or housing inflation can be properly included. Times change as for example the 2% that Bank of Canada Governor Gordon Thiessen got as a target was reasonable in the 90s but less so now.

      • Thank you for your reply, Shaun. I agree that a 2% target for the Canadian economy is less reasonable now than it was in the 1990s. The Bank of Canada’s own research indicates that the ‘true’ rate of inflation implied by a 2% target was 0.2 percentage points lower in 2016 than it was in years past, so just the measurement issue alone called for a lower target rate with the 2016 renewal agreement, which was not implemented. By the way, Thiessen was not adverse to a lower rate than 2% even in the 1990s. Senior Deputy Governor Thiessen tried to negotiate a 1.75% rate with Governor Crow at the time of the 1993 renewal agreement, but Crow was not willing to settle for a rate higher than 1.5%, so Crow was out and Thiessen was in as Governor,the 2% rate was maintained, and we are where we are.

  6. Just to put a few numbers to my post above, since last September, the Fed has injected half a trillion dollars into the banking system and in one day alone, on Jan 2nd bought 57 billion dollars of securities, and that is now when everything is just peachy.

    • Hi Kevin

      Today’s overnight Repo was for $76.9 billion so the problem has not gone away in spite of the fortnightly Repos and the Treasury Bill purchases.

      As to your earlier comment I think that things would fall apart well before an interest-rate of -0.25%.

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