The financial media is abuzz with speculation about what the Fed will do next, and whether it will decide to hike the federal funds rate target at its April Federal Open Market Committee (FOMC) meeting. There is a lot of speculation too as to what the Fed might do in the event of another recession or financial crisis. Some recent articles at the Brookings Institution delve into that possibility. And what is the first potential policy action discussed? Negative interest rates.
Just when you thought central banks couldn’t get any nuttier, the European Central Bank (ECB) has gone and done it. One of the ECB’s new programs may actually pay banks to borrow from it. Take away all the accounting sleights of hands and the net result would be an outright payment to those banks. It’s a direct subsidy, so why all the subterfuge? Just set up a direct pay-for-loan system, the more the banks loan the more the ECB pays them. That’s what most likely will happen eventually. It would be much simpler and much more honest, which is probably why they’re not doing it right now.
The years during and after the financial crisis saw a consensus of monetary easing among central bankers around the world. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all engaged in loosening their monetary policy, creating trillions of dollars worth of new money in an attempt to boost their economies. None of them wanted to be the only one not easing monetary policy, and none of them wanted to the first to return to “tighter” monetary policy. But are we beginning to see this easing consensus breaking down?
The Federal Reserve last week announced that it transferred $97.7 billion of its estimated 2015 net income to the US Treasury department, a new record. There are undoubtedly some people out there who see this as a great thing and wonder why we want to end the Federal Reserve System when the Fed gives the government so much money. You have to dig a little deeper and understand where that money is coming from to figure out what its effects are and why this is problematic.
San Francisco Fed President John Williams stated over the weekend that central banks around the world may need to look at using new tools, including permanently large balance sheets, in order to conduct monetary policy in a world of lower interest rates. Banks, financial institutions, and stock markets around the world cried tears of joy into their glasses of Dom Perignon in response to those comments. While Janet Yellen and others have stated in the past that it might not be until the end of this decade that the Fed returns to a normal balance sheet, financial markets are hoping that that day never occurs.
In late October the world will once again wait with bated breath as the Federal Reserve debates whether or not to hike interest rates. We all know that the Fed doesn’t set all interest rates, but what exactly does it mean to say that the Fed is going to raise (or not raise) interest rates?
The St. Louis Fed is out with a new working paper entitled “On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound.” The paper’s conclusion is that when the central bank’s benchmark interest rate is at zero, quantitative easing can still be an effective means of conducting monetary policy. It also concludes that purchases of private debt might be better than purchases of government debt. Of course, this conclusion could only be helpful to a central bank whose interest rates are at or near zero and which wants to engage in further monetary easing. Does anyone out there know of any central banks that might be in need of such a policy prescription? How long until the Fed starts purchasing student loans, car loans, and credit card debt?