Negative interest rates won’t be coming to the U.S. for the foreseeable future, according to Bank of America.
While Federal Reserve Chairman Jerome Powell said Wednesday that the central bank will use its toolkit "to the fullest" to avert a "prolonged" economic slump, he made clear those tools -- for now -- don't include below-zero rates. Such rates amount to surcharges on excess deposits held by banks and other institutions at the Federal Reserve and are designed to prompt lenders to open credit spigots wider.
“The Fed is rarely this unified in any view: U.S. negative rates are not an attractive monetary policy tool,” wrote Mark Cabana, rates strategist at Bank of America. He added that the central bank “doesn’t see much benefit to them” and finds them “operationally challenging.”
The Fed has nonetheless taken unprecedented action to combat the sharpest economic contraction of the post-World War II era, slashing interest rates to nearly zero, announcing open-ended asset purchases and introducing lending programs to support the flow of credit to small businesses and households.
The central bank will continue to leverage those strategies and others such as forward guidance, instead of initiating a negative interest rate policy, according to Cabana.
"We think we have a good toolkit, and that’s the one we’ll be using," Powell said.
Five central banks, including the Bank of Japan and the European Central Bank, have set interest rates below zero. There is $11.4 trillion of negative-yielding debt globally, making up 18.9 percent of total debt, according to data provided by Deutsche Bank.
President Trump has been a proponent of the Fed turning to negative interest rates, which he says would even the playing field between the U.S., German and Japan. “If they’re going to have the advantage of negative rates, we should too,” Trump recently told reporters at the White House. “I feel strongly we should have negative rates.”
Investment bank Goldman Sachs believes negative interest rates are unlikely for now, but says a second wave of COVID-19 cases caused by states reopening too quickly could change the Fed's mind.
“If the economy has another big setback ... where you have a second wave of infections and it would really take the recovery off course, then I do think that that opens up a possibility of a range of additional actions,” Zach Pandl, a strategist at Goldman Sachs, told CNBC’s “Street Signs Asia.”
“Policymakers are going to want to try new things if the economy is really struggling for a period of time,” he added. “So in that scenario, perhaps they can consider it, otherwise I think it’s pretty low probability at this point.”