The Federal Reserve is widely expected to keep interest rates unchanged in the 1.50% to 1.75% range when it concludes its committee meeting on Wednesday, despite President Trump’s plethora of recent calls for the U.S. to adopt negative interest rates.
- Ahead of the policy meeting this week, Trump yet again criticized the Fed for not lowering interest rates: He has repeatedly called for the central bank to adopt negative interest rates altogether.
- Several big central banks around the world are currently operating under negative rates in an effort to combat low inflation, most notably the European Central Bank and the Bank of Japan where sovereign yields are now trading below zero—effectively giving borrowers an advantage over lenders, and charging bank depositors.
- According to Trump, the U.S. is at a disadvantage to the rest of the world because its Treasury yields and Fed interest rate remain high—though economists disagree on whether or not negative interest rates stimulate economies.
- “The evidence is lacking with respect to negative interest rates and economic growth,” says RSM chief economist Joseph Brusuelas. If we follow the pattern in Japan, we would likely see benefits to autos and housing, but because the U.S. economy is so highly “financialized”(reliant on big banks to provide liquidity for different sectors), negative rates wouldn’t yield a good outcome in the long-term, he argues.
- Similarly, when the U.S. looks at the European experience with negative rates, “it hasn’t stimulated growth but rather has caused strains in their financial system,” says Nicholas Sargen, economic consultant at Fort Washington Investment Advisors.
- In Europe, there were fears of deflation—but in the U.S., the inflation rate is hovering close to the Fed’s target, “so we’re not in that same situation and there’s less urgency,” Sargen says. “I would expect that the Fed would be clear about not considering negative interest rates. They believe it’s a mistake and question its effectiveness.”
Chief critic: “To me, the evidence suggests that you are able to stimulate demand—households and businesses would borrow more to spend, though I don’t agree with the President that it’s a tool to roll out tomorrow afternoon,” says Narayana Kocherlakota, Professor of Economics at the University of Rochester and former president of the Minneapolis Fed (2009-2015). “I’m a big fan of negative rates—not at this moment in time, but it’s certainly something we should keep in the toolkit.”
Key background: The Fed raised interest rates four times in 2018, before a U-turn in monetary policy saw it cut rates three times starting in mid-2019. At its last meeting in December, Fed officials again indicated that they would keep interest rates steady through at least 2020, taking a wait-and-see approach. “What was shaping up as one of the most boring policy rate decisions in some time has suddenly gained a measure of uncertainty because of investor concern about the coronavirus,” says Brusuelas, though he predicts the Fed will “almost certainly” hold the current policy rate.
What to watch for: With overall U.S. economic data looking “very strong right now,” the Fed is not going to touch interest rates on Wednesday, and will instead try to suggest that its benchmark outlook is in a good place, Kocherlakota predicts. One aspect that will be top of mind for Wall Street investors, however, is the economic impact of the spreading coronavirus, which has now killed more than 100 people and infected some 4,700. “The first several questions at the press conference tomorrow will be about the coronavirus,” Brusuelas predicts, though he doesn’t expect the Fed to acknowledge the Chinese-based outbreak in its policy statement. “Never say never, but I’m optimistic that the coronavirus won’t be sufficiently severe to cause a recession in the U.S.—it seems like an extreme event at this stage at least,” Kocherlakota forecasts.
Crucial statistics: Markets largely agree with the Fed’s neutral outlook, at least for now. Federal-funds futures for the next few meetings show an 87% chance that interest rates hold steady, while in the second half of 2020, futures show that the Fed may need to cut rates again to support the economy’s record-long expansion.
This article originally appeared on Forbes.
