‘Very slow’ recovery could lead to negative rates

A former Federal Reserve official says the central bank may consider negative interest rates if the economic recovery faces obstacles in the wake of the COVID-19 crisis.

Narayana Kocherlakota, who headed the Federal Reserve Bank of Minneapolis from 2009 to 2015, told Yahoo Finance on Monday that he does not expect the Fed to take target interest rates below zero, but said a “very slow” recovery could force a re-think down the line.

“I do think there are outcomes that I can foresee – not this year, but maybe next year -that would lead the Fed to start to think about going negative,” said Kocherlakota, now a professor at the University of Rochester. “That would be very bad news.”

Kocherlakota has previously called on the Fed to take rates negative, writing in mid-May that taking rates even “deeply” negative could provide the stimulus needed to bring down longer-term interest rates. 

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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

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Negative interest rates would be ‘problematic’ in US

St. Louis Fed President James Bullard told Yahoo Finance on Monday that negative interest rates are not a clear remedy for the coronavirus-induced economic crisis in the United States, despite market bets on below-zero rates next year.

Bullard said that short-term funding markets in the U.S. operate differently than in Japan and Europe, arguing that implementation of negative rates stateside would be “problematic.”

“I think we can use other tools to handle the situation,” Bullard said.

Bullard pointed to negative interest rate policies deployed by the Bank of Japan and the European Central Bank, adding that “it is not at all clear that they’ve been successful there.”

In March, the Fed slashed interest rates to near-zero and committed to a quantitative easing program that would purchase assets “in the amounts needed.” 

President and CEO of the Federal Reserve Bank of St. Louis James Bullard speaks during an interview with AFP

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Buffett says negative interest rates could have ‘extreme consequences’

At the 2020 Berkshire Hathaway Annual Shareholders Meeting (BRK.A, BRK.B) Warren Buffett addressed a fear that some of his investors have: what happens to the company if interest rates go negative in the United States.

A large portion of Berkshire Hathaway’s business is insurance, with companies like Geico and Gen Re under its ownership. Traditionally, insurance companies invest premiums from customers in safe assets that pay a little interest, like Treasuries, and pay claims out from that interest. 

This is only possible if there’s positive interest accruing on that money. 

“If they’re going to be negative for a long time, you better own equities or something other than debt,” said Buffett. “It’s remarkable what’s happened in the last 10 years. I’ve been wrong in thinking that you could really have the developments you’ve had without inflation taking hold.”

Buffett has talked about this many times in the past. In this

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Warren Buffett on negative rates and ‘the most important question in the world’

If you’re wondering what ultra-low or even negative interest rates will do to the financial markets, you are not alone. Warren Buffett is wondering too. To be clear though, he’s not particularly freaked out. Vexed, but not freaked.

As yields on U.S. Treasury securities fall to record lows — the 10-year Treasury yield (^TNX) dropped to 0.398% at one point this week — many worry that negative interest rates, already prevalent in Japan and Europe, will soon arrive on our shores. If that were to be the case, what the heck would it mean?

I asked Warren Buffett about negative rates last week during an interview at Berkshire Hathaway (BRK-A, BRK-B) headquarters in Omaha.

First, Buffett conceded that in general the bond market with its super low rates, and wildly swinging yield curve, “is really crazy.” But then he made it clear that neither he nor his partner Charlie Munger

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