The Fed Wants to Test How Banks Would Handle Negative Rates

My jaded view would be that the banks would just borrow free money, but not pass anything onto the consumers, instead using it for more high risk trading. Seems to me that the government has a much better way to stimulate the economy: lower rates on existing student loans. If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?

For a good read on why this Keynesian push toward consumption is misguided, check out this 2005 article[1]. The counterargument against consumption as the driver of the economy states that saving and investment actually leads to growth. The thesis of the linked article is that a huge amount of business investment is hidden from GDP numbers since it falls under &quot;net investment,&quot; with two very large sums (business income &amp; business investment) netting out to a small number. When we ignore the huge amount of business investment and focus only on the net, we miss its importance.<p>Negative interest rates are simply the latest contortion of the Keynesians that will fail to produce the desired results yet again.<p>[1] <a href="https:&#x2F;&#x2F;mises.org&#x2F;library&#x2F;standing-keynesian-gdp-its-head-saving-not-consumption-main-source-spending" rel="nofollow">https:&#x2F;&#x2F;mises.org&#x2F;library&#x2F;standing-keynesian-gdp-its-head-sa...</a>

Let&#x27;s assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?

I wish the Fed would research sending checks to tax payers as a stimulus strategy. Because it appears the low interest rate (and QE) strategy isn&#x27;t as effective as it once was - in part due to uncooperative banks.<p>If&#x2F;when the time comes to put the breaks on the economy, the money could be removed from circulation with a slight uptick in taxes of some sort (income, gas, tariffs, whatever) -- but unlike a normal tax, we would apply it against the Fed&#x27;s balance sheet and not place it in government coffers.<p>Milton Friedman and Ben Bernanke have called this idea helicopter money.<p><a href="http:&#x2F;&#x2F;www.economist.com&#x2F;blogs&#x2F;buttonwood&#x2F;2014&#x2F;11&#x2F;reviving-economy" rel="nofollow">http:&#x2F;&#x2F;www.economist.com&#x2F;blogs&#x2F;buttonwood&#x2F;2014&#x2F;11&#x2F;reviving-e...</a>

This is a classic failure of aggregate demand, and it cannot be fixed with monetary policy alone. I&#x27;m struck by the continued relevance of the lessons of the Great Depression.<p>For example, see these lines from FDR&#x27;s First Inaugural Address:<p><i>Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.<p>Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.<p>True they have tried, but their efforts have been cast in the pattern of an outworn tradition.<p>&gt;&gt;Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.<p>They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.</i>

&gt; New York Fed President William Dudley said last month that policy makers were &quot;not thinking at all seriously of moving to negative interest rates.<p>&gt; &quot;But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action,&quot; he said on Jan. 15.<p>The Fed continues to fritter away whatever credibility it has left by waffling back and forth on interest rates.<p>It raised interest rates and committed to 2.0% core inflation by 2018 just two months ago. By including this long-term negative interest rate scenario in its 2016 stress tests, it is basically admitting that there is some non-negligible probability that it will be unable to follow through on this commitment, and that banks should be prepared to weather the storm if and when it completely loses control of its grip over the direction of the short term interest rate.<p>The article does not actually speculate on what might happen if the Fed were to reverse its rate hike and instead lower the FFR into negative territory. I&#x27;d imagine that basically nothing would change, and that the banks would simply take a 0.25% haircut on their holdings of 3-month treasury bonds as they have been doing in Europe for the past 1.5 years. They will not pass this negative interest rate onto regular customers as this would either (a) drive them to another bank which would benefit from the new deposits or (b) force consumers to withdraw deposits and hold cash instead. Banks need these deposits to loan against, and a 0.25% &quot;holding tax&quot; on a relatively small portion of their holdings would not justify the loss in deposits. Banks will just eat the hit to their profit margins and life will go on as normal in the supply side of money world.

What I read from the article: Relax, it is just a stress test. We aren&#x27;t going to actually do this. We would only do this in the case of an emergency. We would totally do this, but only if we have to. We have to do this.

I want to know how bankers would handle negative salaries.<p>Edit: Sorry if that sounded snarky, it was my attempt at a witty way of saying, &quot;it doesn&#x27;t make sense for there to be a negative price for provision of a scarce good, imagine if we did that to labor, like yours&quot;.

Skimmed the article, did a Ctrl+F, didn&#x27;t see mention of essentially channeling free money into depressed bond interest rates leading to even more aggressive corporate stock buybacks which predominately benefit the top 1% investor class in the United States, without any discrenable benefit to wage-level workers or the drastic income inequality, was not surprised.

So bad fiscal policy and regulatory policies have us finally at the end of the road? Going negative? Since people won&#x27;t spend and are so intent on saving they will force their hand or punish them so they become good little Keynesians ?<p>Well the only upside is that it won&#x27;t encourage people to want a digital currency based system. Those little bank notes under the bed cannot be hacked, cannot be forbidden to be spent on specific goods or people, and cannot be confiscated out of bank.<p>So I guess this just really comes down to a case that over the top government borrowing is pulling so much money out of the markets that they need to force private investors to put money in

Congress should have never given up it&#x27;s constitutional power to control monetary policy, the Federal Reserve (which is neither) should be audited and the backlash from the revelations should be used to push a revocation of the Federal Reserve Act which was passed under dubious circumstances by shady men connected to the European banking oligarchy, along with various other bad legislation pushed through by the same groups (that also pushed us into the world wars.)<p>I&#x27;ve said it before, and I&#x27;ll say it again. Bankers are more the enemy of the people than terrorists, and just because Dimon and Blankfein need an extra 300mil bonus doesn&#x27;t mean we should allow them to gut our economy. Unlike some of the placating bullshit I&#x27;ve seen people posting in this thread, the 07-08 crash was because of abuse, fraud, and lack of oversight, and we need to start sending the top people to jail. If not, then we are just going to have another recession, and another, and maybe a depression.<p>Adjusted for inflation rates are basically negative already anyway! Negative rates punish the middle class, the workers, the pensioners, and retirees, while funneling even more money to the already grotesquely wealthy uber-elite.

Central banks exist to cram more credit into an economy than it would otherwise support. If the people refuse to borrow &amp; spend, they&#x27;ll just take the money right out of their bank accounts.<p>Even hinting at this level of meddlesome social engineering by the managers of our currency ought to elicit reactions of disgust and outrage.

The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be &quot;money for free&quot;.<p>It is similar to how you a credit from a bank when you buy a house. Yes, the bank gives you money but you give (the rights to) the house to the bank until you fully paid your credit back.<p>The banks then goes to the Fed and says: &quot;Here, thake this house as security and print me some real money.&quot;<p>The Fed says: &quot;Great house you have there; here is the money and here is some more.&quot;<p>In the end this leads to the creation of things that are accepted by the Fed as securities, for example houses. With negative interest rates, the Fed basically pays for the creation of such securities.

I think we already have that... It&#x27;s called &quot;bank fees&quot;, i.e., depositors pay the bank to keep their money instead of the bank paying interest.

WTF!. Why doesn&#x27;t the Fed just send money to consumers? You can&#x27;t budge CPI by making Ray Dalio and Jamie Dimon richer (which is the main effect of ZIRP). There&#x27;s only so much eggs and butter they can consume.

Rates will never be negative when banks lend FROM the fed.<p>Interest rates could become negative when the banks lend TO the fed (IE parking the money overnight).

First of all, there&#x27;s a misconception on this discussion here. The Fed is <i>PAYING</i> banks the Fed Fund Rate (currently sitting at 0.5%) for parking their excess reserves with the Federal Reserve overnight. So a negative interest rate means that the banks have to pay the Fed money to hold their money. You can think of this as if your bank charges you to hold your money for you.<p>Why would the Fed want to do this?<p>Banks make money by lending out deposits and charging a higher interest rate than what they pay out. To support their lending operations, banks need to hold a percentage of the asset as reserves. In recent years, banks have been holding $2.3T [1][2] more than the minimum reserve that is required. This means that the banks are sitting on the deposit and not lending it out. The excess reserve are then deposit with the Federal Reserve earning 0.5% interest. What the Fed wants to do is encourage banks to lend out the money rather than sit on it so that it stimulates the economy. (More lending-&gt;increase asset prices-&gt;people feel richers-&gt;people buy more stuff-&gt;companies hire more people-&gt;stimulates economy)<p>Why aren&#x27;t banks lending?<p>There are a number of reasons why banks are not lending as much as they used to. After 2008, banks have become much more risk adverse. In addition, regulations have forced tighter lending standards on the banks reducing the amount of loans issued[3]. In addition, Dodd-Frank credit risk retention regulation now forces banks to have &quot;skin in the game&quot; when they issue and securitize loans and mortgages [4]. Because of this and the collapse of 2008 is still fresh in the bank&#x27;s minds, they have increased lending standards and reduced their risk profile.<p>So, the result is that they sit a huge pile of excess reserves that they can&#x27;t lend out.<p>In normal environments, the market resolves this problem itself. Banks that are lending will offer higher rates to attract deposits from the banks that are not lending and offering lower rates.<p>However, in recent decades, there&#x27;s been a major consolidation of banks. Between 1990-present, 37 regional banks have combined into or acquired by the 4 large banks (Citi, JPMorgan Chase, BoA, Wells Fargo)[5]. These top 4 banks alone hold 6.46T of the $10.6T in consumer deposits. These four banks have pay an interest rate of 0.01%. The national average interest rate is 0.06%.<p>On the other hand, commercial lending banks, like CIT, Sallie Mae, and Synchrony, are trying to attract deposits paying over 15x the national average interest rate. These traditionally lending banks have had to set up high yield online banking operations to attract deposits to support their lending operations.<p>The issue is that most consumers don&#x27;t shop around for high yield accounts. Many don&#x27;t realize that there is such a drastic difference between the high yield accounts and their local banks.<p>This leads to a significant amount of assets being locked up at the large banks that aren&#x27;t lending. Lenders, like Sallie Mae, end up paying higher rates on deposits and need to charge higher rates for their student loans.<p>What happens to consumer deposits when Fed Fund Rate goes negative?<p>For the past couple of years, these large banks have been trying to shed excess deposits. They have lowered their interest rate to practically 0%. The large banks have even charged large institutional depositors to hold their money [7]. If the Fed Fun Rates go negative, banks will try to charge greater fees for banking services and&#x2F;or encourage consumers to move their funds to other banks. The difficulty here is that the banks want to maintain the relationship with the consumer to generate future revenue while not holding the deposits.<p>This misallocation and inefficiency in the deposit marketplace is what we are trying to solve with smart technology.<p>[1] <a href="http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;releases&#x2F;h3&#x2F;current&#x2F;" rel="nofollow">http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;releases&#x2F;h3&#x2F;current&#x2F;</a><p>[2] <a href="https:&#x2F;&#x2F;research.stlouisfed.org&#x2F;fred2&#x2F;series&#x2F;EXCSRESNS" rel="nofollow">https:&#x2F;&#x2F;research.stlouisfed.org&#x2F;fred2&#x2F;series&#x2F;EXCSRESNS</a><p>[3] <a href="http:&#x2F;&#x2F;www.urban.org&#x2F;research&#x2F;publication&#x2F;impact-tight-credit-standards-2009-13-lending" rel="nofollow">http:&#x2F;&#x2F;www.urban.org&#x2F;research&#x2F;publication&#x2F;impact-tight-credi...</a><p>[4] <a href="https:&#x2F;&#x2F;corpgov.law.harvard.edu&#x2F;2014&#x2F;11&#x2F;16&#x2F;a-closer-look-at-us-credit-risk-retention-rules&#x2F;" rel="nofollow">https:&#x2F;&#x2F;corpgov.law.harvard.edu&#x2F;2014&#x2F;11&#x2F;16&#x2F;a-closer-look-at-...</a><p>[5]<a href="http:&#x2F;&#x2F;www.upworthy.com&#x2F;how-37-banks-became-4-in-just-a-few-decades-all-in-one-astonishing-chart" rel="nofollow">http:&#x2F;&#x2F;www.upworthy.com&#x2F;how-37-banks-became-4-in-just-a-few-...</a><p>[6] <a href="http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;releases&#x2F;lbr&#x2F;current&#x2F;" rel="nofollow">http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;releases&#x2F;lbr&#x2F;current&#x2F;</a><p>[7] <a href="http:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;big-banks-to-americas-companies-we-dont-want-your-cash-1445161083" rel="nofollow">http:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;big-banks-to-americas-companies-...</a>

This is hugely disappointing. Its been 8 years since the economic crash and the Fed has been trying to inflate this economy using monetary policy and we have yet to eclipse 3% real GDP growth for a whole year. They FED has been trying to create inflation and they have failed. Where is the critical thinking at the policy making&#x2F; decision making level ? At some point we have to reach the obvious conclusion that current economic policy models are broken, don&#x27;t work, and we need new leadership and a fresh approach.<p>Obama is largely to blame for this. He chose to listen to establishment&#x2F;wall street economic advisers rather than more progressive ( say Keynesian) thinkers. This is why you are seeing Bernie&#x2F;Elizabeth Warren gaining in popularity. Quite sadly, the Gap between the middle class and extremely wealthy in this country have never increased more so than under Obama, a Democrat.