(Bloomberg Opinion) -- Just when it seemed like the tide had officially turned against the experiment of negative interest rates, former Federal Reserve Chairman Ben S. Bernanke entered the fray.
In his address to the American Economic Association’s annual meeting from Jan. 3-5, he cautioned against ruling out a subzero fed funds rate in the U.S. Here’s how he summarized it in a blog post:
“The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space; and because entirely ruling out negative short rates, by creating an effective floor for long-term rates as well, could limit the Fed’s future ability to reduce longer-term rates by QE or other means.”
Leaving aside what “constructive ambiguity” means for a moment, this tacit endorsement of negative interest rates flies in the face of mounting skepticism about the policy from just about every corner of the globe. The world’s oldest central bank, Sweden’s Riksbank, officially ended its experiment with subzero rates last month, in what was widely interpreted as a message about the damage that can come from keeping yields suppressed for too long. In Japan and the euro zone, institutional investors have been forced to either buy riskier assets or accept exposure to currency fluctuations.
Even current Fed staff have observed that negative interest rates have had “possible adverse side effects” in other regions. “Differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States,” according to minutes of the central bank’s Oct. 30 meeting. Dallas Fed President Robert Kaplan last month said he was not at all sure that negative rates have helped Europe and he doesn’t anticipate the U.S. will go below zero. Minneapolis Fed President Neel Kashkari, one of the most dovish regional governors, said negative rates should be the very last tool that policy makers turn to in an economic downturn.
In this context, Bernanke’s comments sound tone-deaf. As Bloomberg News’s Cameron Crise noted earlier this week, the Fed’s stated objective is to foster “price stability and moderate long-term interest rates,” which helps promote maximum employment. Is it so bad, then, for the central bank to communicate “an effective floor for long-term rates” by ruling out going negative? Especially if that floor is close to zero? By contrast, I’m not sure anyone would categorize the German 10-year yield of -0.3% as “moderate,” in any sense of the word.
On top of that, Bernanke argued policy makers may have been overly cautious with employing negative interest rates because of potentially higher levels of inflation and greater income inequality — risks that he said have hardly materialized. While it’s true that U.S. inflation has struggled to consistently meet the Fed’s 2% target, Main Street is feeling the pinch from rising costs of health care, prescription drugs and basic necessities. Central bankers have heard these concerns. And the assertion that a decade of easy monetary policy hasn’t widened the rift in income equality doesn’t hold up to scrutiny, in America or abroad.
Of course, the concept of negative interest rates in the U.S. is purely theoretical for now. Fed Chair Jerome Powell and other officials have made clear that the bank’s lending benchmark will stay in a range of 1.5% to 1.75% this year, unless something drastically changes their economic outlook. Bond traders are betting on one Fed interest-rate cut in 2020.
Still, Bernanke’s fellow central bankers sounded gloomy at the conference in San Diego. “We’re still seeing no significant increases in estimates of productivity growth, in estimates of trend GDP growth,” New York Fed President John Williams said. “We have come to the realization that these factors are basically the hand we’ve been dealt for the next five to 10 years.” Bank of Japan Deputy Governor Masazumi Wakatabe warned that “Japan’s experience can happen in other countries,” and former European Central Bank President Mario Draghi acknowledged that “for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion.”
If the 2020s are ultimately a decade defined by no interest-rate increases and ever-easier monetary policy, then the Fed’s stance on negative interest rates will inevitably become more than just an academic exercise. The question for bond traders is whether Bernanke’s view is outdated, or a sign of what’s to come.
My hunch is that current Fed officials are leery of negative interest rates — the public comments suggest as much. It’s also notable that Fed Governor Lael Brainard advocated first for yield-curve control if the fed funds rate hit zero and policy makers needed “an extension of our conventional policy space.” Bernanke, in calling for “constructive ambiguity,” is probably just cautioning current and future central bankers to never say never — even if, behind the scenes, they’ve made up their minds.
That said, some Fed research has argued negative interest rates would have provided a bigger boost to the U.S. economy after the last recession. It’s easy to dismiss the policy during the longest economic expansion on record. It’s harder during the throes of a contraction. So it can only mean so much that Powell said after the Fed’s September meeting that he doesn’t see the central bank resorting to negative interest rates, even when backed up against the effective lower bound.
He and future Fed leaders should stick to that plan, even if they heed Bernanke’s advice and keep their options open. The evidence is just too flimsy at this point to conclude that the benefits of negative interest rates exceed the costs. It would seem that they merely exacerbate the trends of elevated corporate leverage and greater investor risk-taking — financial stability risks that former Fed Chair Janet Yellen flagged as “a serious concern.”
Clearly, the era of negative interest rates isn’t coming to a close anytime soon. But Bernanke’s comments may be looked back on as one of the last gasps of the unconventional monetary policy.
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Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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