Trump wants negative rates - but there's a dark side

By MarketsFOXBusiness

Negative interest rates would hurt bank lending: Former Dallas Fed adviser

Former Dallas Fed adviser Danielle DiMartino Booth provides insight into Trump's idea to lower interest rates.

President Trump once again lashed out at the Federal Reserve Thursday after the European Central Bank cut rates deeper into negative territory.

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The president says the Fed should cut rates to zero, or less, in order to lock in lower borrowing costs for the long term.

“They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!,” Trump tweeted.

While negative interest rates may sound like a good idea, some money experts say there is a dark side to the policy, which has produced mixed results elsewhere. The combination of European banks’ reluctance to cut their deposit rates below zero and a flat yield curve has been squeezing their profits.

“As a highly leveraged property developer, Trump is thinking about negative rates from the perspective of a borrower, but the Fed’s lukewarm appetite for negative rates is partly because officials know that it could cause outage among savers and drag the central bank into a political maelstrom,” wrote Capital Economics Chief U.S. Economist Paul Ashworth in a Wednesday note to clients.

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Office of Trade and Manufacturing Policy Director Peter Navarro backed up Trump's view Thursday that the Fed needs to at least match what's going on in Europe.

"This is a chess match," he told "Mornings with Maria." "Fed's playing checkers in a chess world. You've gotta look at what the Europeans just did, you've gotta match that and raise it."

HIs comments came a day after Trump called the Fed "boneheads" for not taking advantage of "a once in a lifetime opportunity" to lock in rates at ultra low levels.

JPMorgan CEO Jamie Dimon said he wasn’t thrilled about the prospects of negative rates when discussing the idea Tuesday at a conference in New York. He said he thought rates this year would be “heading up not down” and that his bank has begun “thinking about how to be prepared” for negative rates should the Fed head in that direction.

“Obviously, you’ve got to worry about the long-term effect of those interest rates,” Dimon said. “But it’s hard. There are businesses it doesn’t affect at all. And there are businesses where it just sucks into your margin and there’s very little you can do about it.”

The idea of cutting rates below zero also doesn’t sit well with former Dallas Fed adviser Danielle DiMartino Booth.

“Our banking system has created credit to help grow American businesses, to help American families buy homes,” former Dallas Fed adviser DiMartino Booth told “Varney & Co.” on Thursday.

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“And if you were to have the banking system waylaid by negative interest rates they would not be able to lend as they do today. In President Trump’s words ‘we are a nation of debt,’ and if you impose negative interest rates in this country you will bring the economy that is built on debt and that greases the skids of this economy to a standstill. It is the worst, most un-American idea I’ve ever heard," she said.

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