Federal Reserve Chair Janet Yellen on Thursday said negative interest rates in the U.S. are unlikely but not out of the question.
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As U.S. stock markets plummeted once again Thursday, dragged down by financial stocks reeling from the impact of negative rates around the world, Yellen told the Senate Banking Committee the somewhat radical policy was considered by Fed policymakers in 2010 but abandoned as unworkable.
Now, with central banks in Japan and much of Europe pushing rates into negative territory in an effort to provide a jolt to their economies, the Fed is taking another look but still has a lot of studying to do, Yellen said in her second day of testimony before Congress.
“We’re taking a look at them again because we would want to be prepared in the event that we need to add accommodation,” Yellen said. “We haven’t finished that evaluation, we need to consider the U.S. institutional context and whether they would work well here.”
“It’s not automatic, there are a number of things to consider,” she added. “I wouldn’t take them off the table, but we would have work to do to judge whether they are workable here.”
Responding to questions about whether the Fed has the legal authority to push rates into negative territory, Yellen said that, too was being evaluated, but she was unaware of any restrictions blocking the Fed from initiating the policy.
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“I am not aware of any legal restriction that would mean we could not establish negative rates, but we have not looked closely at the legal side of this,” she said.
Elsewhere, Yellen suggested the Fed is still focused on gradually raising rates – ie., normalizing monetary policy – and doesn’t yet see a scenario in which rates will be lowered.
The Fed raised rates in December for the first time in nearly a decade, citing a strong labor market and optimism that a tightening job market would lift wages and eventually push inflation toward the Fed’s 2% target.
Yellen, in prepared remarks made Wednesday and Thursday, acknowledged the recent global turbulence that has rocked stock markets, but maintained the Fed’s position that U.S. labor markets should continue to strengthen in 2016.
Asked specifically if recent events had forced the Fed to rethink its strategy of gradually raising rates and consider lowering them, Yellen said, “We’ve not yet seen a shift in the economic outlook to make that highly likely…It’s not what I think is the most likely scenario.”