Yellen Says Fed Looking at Negative Rates

The FOMC wants to be prepared in case it needs to reverse course and make monetary policy more accommodative, Chair Janet Yellen told Congress.
Matthew HellerFebruary 12, 2016

In an indication that the U.S Federal Reserve is reevaulating its monetary policy amid turbulence in the financial markets, Fed Chair Janet Yellen said the central bank was considering cutting interest rates below zero as a way to stimulate the economy.

The Fed in December raised short-term rates after keeping them near zero for seven years and was expected to follow up with four, 25-basis-point rate hikes this year. But in testimony before Congress Thursday, Yellen said the Fed is studying the feasibility of imposing negative rates.

“A lot has happened since” the December Fed meeting, she noted. While a recession is not “the most likely scenario,” she testified, “We are …looking very carefully at global financial market and economic developments that create risk to the economy.

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“We are evaluating them, recognizing that these factors may well influence the balance of risks or the trajectory of the economy, and thereby might affect the appropriate stance of monetary policy,” she added.

As the Wall Street Journal reports, weeks of financial market turbulence “have Fed officials reassessing whether their projections for steady growth and job gains and gradually rising inflation will hold up in the months ahead.” The Fed’s next policy meeting is March 15 and 16.

By imposing negative rates, the Fed would in effect be charging banks that leave money on deposit with them. Such rates are meant to encourage banks to lend money out rather than park it for safe-keeping.

The Bank of Japan, the European Central Bank, and other central banks in Europe have recently moved in that direction as they try to stimulate stronger economic growth and higher inflation.

“In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation,” Yellen said.

Her comments were greeted with widespread skepticism, particularly among Republicans. Negative rates would “crush net interest margins for banks,” warned Sen. Pat Toomey, Republican from Pennsylvania. “It would put the us deep in the midst of a global currency war.”