Negative interest rates play a vital role in providing stimulus to sluggish economies and, if deployed through the financial crisis, might have been integral in helping to boost the American economy, based on a new report published by the San Francisco Federal Reserve.
“Negative rates of interest subsequently seem like a powerful monetary policy tool that could assist ease financial circumstances when interest rates would otherwise be held at zero because the perceived lower bound, as was the case in the U.S. from late 2008 via 2015,” the report’s author, bank economist Jens Christensen, wrote.
Although the U.S. has always had favorable interest rates, different countries have tested with sending rates within the negative territory in hopes of staving off a rising global slowdown. Thus far, five central banks have interest rates set below zero, including Japan, Denmark, Sweden, Switzerland, and the European Central Bank.
A recession could theoretically prompt the Fed to eventually send charges which have remained historically low within the aftermath of the 2007 recession into negative territory as they gradually trim over the next few years.
However, Chair Jerome Powell recently dismissed the concept the U.S. central bank will one-day use negative interest rates to combat an economic downturn.
“It’s something we didn’t see as an ideal tool in our institutional context,” he stated throughout a question-and-answer session in Denver.
“I believe different central banks around the world did different things, and we will observe how those things work,” he added. “However, I don’t assume we regard that as a first-order tool, or something we’d be likely to use.”
Thus far this year, policymakers on the U.S. central bank have voted to cut the benchmark federal funds rate twice between a range of 1.75 % to 2 %. They’re widely expected to reduce rates by 25 basis points for the third time throughout their upcoming meeting at the end of October.