Post by The Big Daddy C-Master on May 15, 2016 20:49:09 GMT -5
www.investopedia.com/articles/markets/051316/yellen-wont-completely-rule-out-negative-rates.asp
Negative interest rates, which first appeared in Sweden in 2009 to almost universal indifference, are now common enough that $10 trillion worth of government debt requires lenders to pay their borrowers, according to Fitch. Since the European Central Bank's adoption of the policy in June 2014, and particularly following Japan's move into negative rates in January, American investors have feared that the Fed could follow suit, with unpredictable consequences.
A letter penned by Federal Reserve Chair Janet Yellen Thursday won't dispel these fears. Responding to questions from Congressman Brad Sherman, a Democrat representing California's San Fernando Valley, Yellen wrote, "while I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences."
The full text of Sherman's questions and Yellen's response are reproduced at the end of this article.
Sherman's question had to do with the legality of negative interest rates. He initially posed the question following Yellen's February 10 testimony before the House Financial Services Committee, when she said that negative rates were not a "preferred" policy tool. She said that she was not aware of a specific reason why the Fed could not set negative rates, but added that she was not certain.
The line of questioning centered on a 2010 policy memo in which the Fed described stress tests for negative interest rates. (See also, How Negative Interest Rates Work.)
The following day, February 11, Yellen testified before the Senate Banking Committee. She was more explicit about the potential for introducing negative rates, saying, "we are taking a look at them again" and "I wouldn't take [them] off the table." She also sounded a somber note on the economy: "Foreign economic developments, in particular, pose risks to U.S. economic growth."
Stocks plunged as Yellen testified, with the S&P 500 hitting a two-year intraday low of 1,810.10 on February 11, an 11.5% year-to-date decline.
Yellen did not directly address the issue of negative rates' legality, either in February or in her letter to Sherman. The letter also skirted the issue of whether the Federal Reserve would introduce a fourth round of quantitative easing. Yellen wrote, "It simply is not possible to predict the circumstances in which it might be appropriate to implement particular policies, such as conducting additional quantitative easing or formulating targets for longer-term rates."
Referencing the potential for Fed assistance to distressed states, territories and municipalities – the question specifically referenced Chicago’s Public
School System, the city of Detroit, and Puerto Rico – Yellen wrote that the Fed "does not have the legal authority to lend to a specific borrower" and said that these were matters for Congress and the White House.
She also reiterated the Fed's economic outlook, writing, "we expect that the economy will continue to strengthen and that inflation will return to our 2 percent goal over time."
Below is the full text of Congressman Sherman's questions and Yellen's response, courtesy of the Congressman's D.C. office:
Today, Janet Yellen, Chair of the Federal Reserve Board of Governors, responded to a question Congressman Sherman submitted for the record after her February 10, 2016 testimony before the House Financial Services Commission. The question and response are attached, and copied below:
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System from Representative Sherman:
1. What are the Federal Open Market Committee’s (FOMC) plans in in the event of another economic downturn? Specifically, has the FOMC determined whether it has legal authority to implement the following tools:
Negative interest rates;
Assistance to states, municipalities, and territories in fiscal distress (e.g., Chicago’s Public School System, the city of Detroit, and Puerto Rico);
An emergency lending program using the Federal Reserve Act Section 14 (12 U.S.C. § 355) authority to make short-term public investments;
Under what contingencies would the FOMC consider utilizing the tools listed above?
Under what circumstances would the FOMC initiate a fourth round of quantitative easing?
Under what circumstances would the FOMC formulate a target (e.g., 1.0%) for the five year Treasury rate?
The Federal Reserve’s response to economic conditions, including any future financial crisis, very much depends on the circumstances. It is important to note that there have been many periods of economic downturn coupled with severe strains in financial markets that did not require the use of emergency lending programs, innovative monetary policy tools, or other extraordinary tools. Indeed, prior to the financial crisis in 2007-2009, the Federal Reserve had not utilized its emergency lending authorities since the Great Depression.
It simply is not possible to predict the circumstances in which it might be appropriate to implement particular policies, such as conducting additional quantitative easing or formulating targets for longer-term rates. As the FOMC has noted in recent statements, we expect that the economy will continue to strengthen and that inflation will return to our 2 percent goal over time.
Consistent with that outlook, the FOMC has noted that it believes the economic outlook will evolve in way that will warrant a gradual increase in the target federal funds rate. Of course, if the economic outlook evolves in an unexpected way, the Federal Reserve will adjust the stance of policy appropriately to foster progress toward its long-run goals of maximum employment and stable prices.
The policy tools available to the Federal Reserve are provided by statute. The Federal Reserve’s authority to purchase obligations issued by municipalities is limited to very specific types of obligations and may be done only in the open market. The Federal Reserve’s authority to provide emergency credit to non-depository institutions is limited to programs with broad-based eligibility aimed at supporting the flow of credit to households and businesses; under these provisions, the Federal Reserve does not have the legal authority to lend to a specific borrower, including a municipality, that is failing or seeking to avoid resolution. More generally, providing assistance to municipalities inherently involves political judgments. As a result, as the Federal Reserve has noted previously, any program designed to provide assistance to municipal governments is a matter for the Congress and the Administration to address.
Negative interest rates are a tool employed by countries in Europe and elsewhere. By some accounts, these policies appear to have provided additional policy accommodation. As I have noted previously, we certainly are trying to learn as much as we can from the experience of other countries. That said, while I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences.
Negative interest rates, which first appeared in Sweden in 2009 to almost universal indifference, are now common enough that $10 trillion worth of government debt requires lenders to pay their borrowers, according to Fitch. Since the European Central Bank's adoption of the policy in June 2014, and particularly following Japan's move into negative rates in January, American investors have feared that the Fed could follow suit, with unpredictable consequences.
A letter penned by Federal Reserve Chair Janet Yellen Thursday won't dispel these fears. Responding to questions from Congressman Brad Sherman, a Democrat representing California's San Fernando Valley, Yellen wrote, "while I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences."
The full text of Sherman's questions and Yellen's response are reproduced at the end of this article.
Sherman's question had to do with the legality of negative interest rates. He initially posed the question following Yellen's February 10 testimony before the House Financial Services Committee, when she said that negative rates were not a "preferred" policy tool. She said that she was not aware of a specific reason why the Fed could not set negative rates, but added that she was not certain.
The line of questioning centered on a 2010 policy memo in which the Fed described stress tests for negative interest rates. (See also, How Negative Interest Rates Work.)
The following day, February 11, Yellen testified before the Senate Banking Committee. She was more explicit about the potential for introducing negative rates, saying, "we are taking a look at them again" and "I wouldn't take [them] off the table." She also sounded a somber note on the economy: "Foreign economic developments, in particular, pose risks to U.S. economic growth."
Stocks plunged as Yellen testified, with the S&P 500 hitting a two-year intraday low of 1,810.10 on February 11, an 11.5% year-to-date decline.
Yellen did not directly address the issue of negative rates' legality, either in February or in her letter to Sherman. The letter also skirted the issue of whether the Federal Reserve would introduce a fourth round of quantitative easing. Yellen wrote, "It simply is not possible to predict the circumstances in which it might be appropriate to implement particular policies, such as conducting additional quantitative easing or formulating targets for longer-term rates."
Referencing the potential for Fed assistance to distressed states, territories and municipalities – the question specifically referenced Chicago’s Public
School System, the city of Detroit, and Puerto Rico – Yellen wrote that the Fed "does not have the legal authority to lend to a specific borrower" and said that these were matters for Congress and the White House.
She also reiterated the Fed's economic outlook, writing, "we expect that the economy will continue to strengthen and that inflation will return to our 2 percent goal over time."
Below is the full text of Congressman Sherman's questions and Yellen's response, courtesy of the Congressman's D.C. office:
Today, Janet Yellen, Chair of the Federal Reserve Board of Governors, responded to a question Congressman Sherman submitted for the record after her February 10, 2016 testimony before the House Financial Services Commission. The question and response are attached, and copied below:
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System from Representative Sherman:
1. What are the Federal Open Market Committee’s (FOMC) plans in in the event of another economic downturn? Specifically, has the FOMC determined whether it has legal authority to implement the following tools:
Negative interest rates;
Assistance to states, municipalities, and territories in fiscal distress (e.g., Chicago’s Public School System, the city of Detroit, and Puerto Rico);
An emergency lending program using the Federal Reserve Act Section 14 (12 U.S.C. § 355) authority to make short-term public investments;
Under what contingencies would the FOMC consider utilizing the tools listed above?
Under what circumstances would the FOMC initiate a fourth round of quantitative easing?
Under what circumstances would the FOMC formulate a target (e.g., 1.0%) for the five year Treasury rate?
The Federal Reserve’s response to economic conditions, including any future financial crisis, very much depends on the circumstances. It is important to note that there have been many periods of economic downturn coupled with severe strains in financial markets that did not require the use of emergency lending programs, innovative monetary policy tools, or other extraordinary tools. Indeed, prior to the financial crisis in 2007-2009, the Federal Reserve had not utilized its emergency lending authorities since the Great Depression.
It simply is not possible to predict the circumstances in which it might be appropriate to implement particular policies, such as conducting additional quantitative easing or formulating targets for longer-term rates. As the FOMC has noted in recent statements, we expect that the economy will continue to strengthen and that inflation will return to our 2 percent goal over time.
Consistent with that outlook, the FOMC has noted that it believes the economic outlook will evolve in way that will warrant a gradual increase in the target federal funds rate. Of course, if the economic outlook evolves in an unexpected way, the Federal Reserve will adjust the stance of policy appropriately to foster progress toward its long-run goals of maximum employment and stable prices.
The policy tools available to the Federal Reserve are provided by statute. The Federal Reserve’s authority to purchase obligations issued by municipalities is limited to very specific types of obligations and may be done only in the open market. The Federal Reserve’s authority to provide emergency credit to non-depository institutions is limited to programs with broad-based eligibility aimed at supporting the flow of credit to households and businesses; under these provisions, the Federal Reserve does not have the legal authority to lend to a specific borrower, including a municipality, that is failing or seeking to avoid resolution. More generally, providing assistance to municipalities inherently involves political judgments. As a result, as the Federal Reserve has noted previously, any program designed to provide assistance to municipal governments is a matter for the Congress and the Administration to address.
Negative interest rates are a tool employed by countries in Europe and elsewhere. By some accounts, these policies appear to have provided additional policy accommodation. As I have noted previously, we certainly are trying to learn as much as we can from the experience of other countries. That said, while I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences.
