Negative rates are ‘not something that we are looking at’

Federal Reserve Chairman Jerome Powell said the central bank is not considering taking the benchmark interest rate below zero, despite renewed calls from President Donald Trump to do so.

In a webcast Wednesday morning, Powell reiterated that the central bank will rely on forward guidance and asset purchases.

“The committee’s view on negative rates really has not changed,” Powell said. “This is not something that we’re looking at.”

Last week, Fed funds futures contracts priced in bets of the Fed taking rates negative by early 2021.

As market speculation over negative rates gained momentum, Trump tweeted Tuesday that the Fed should follow the Bank of Japan and the European Central Bank in pushing rates below zero.

Last October, the Federal Open Market Committee unanimously agreed that negative interest rates did “not appear to be an attractive monetary policy tool” in the U.S. Since Fed funds futures contracts traded above par, Fed officials have waved off the possibility of negative interest rates.

St. Louis Fed President James Bullard told Yahoo Finance on Monday that negative interest rates would be “problematic” in the United States, arguing that the policies have yet to prove their effectiveness in Japan and the Eurozone.

Powell echoed those sentiments in his Wednesday appearance, saying the debate over negative interest rates is an “unsettled area.”

“I know there are fans of the policy but for now it’s not something that we are considering,” Powell said. “We think we have a toolkit and that’s the one we will be using.”

Powell has on, multiple occasions, swatted down the possibility of negative interest rates.

What about forward guidance?

Evercore ISI’s Krishna Guha and Ernie Tedeschi wrote Wednesday that it is clear that the Fed “leans against” negative rates. But Guha and Tedeschi cautioned that if the Fed’s actions prove inadequate and the economy suffers a deeper recession than anticipated, the outcome “could end up with the U.S. in negative rates.” 

They argued that the Fed should offer more forward guidance on interest rates and its pace of asset purchases to message a stronger commitment to easier policy.

As a response to the COVID-19 crisis, the Fed in March slashed rates to near zero and restarted its crisis-era quantitative easing program. As of late, the Fed has leaned on its arsenal of liquidity facilities to prevent solvency problems from arising in the financial system.

The next Federal Open Market Committee meeting will take place June 9 and 10. 

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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