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The Fed Wants to Test How Banks Would Handle Negative Rates


In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the central bank said in announcing the stress tests last week.
In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.
Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.
But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019.
Not a Forecast
"This scenario does not represent a forecast of the Federal Reserve," the central bank said. It also assumes "that the adjustment to negative short-term rates proceeds with no additional financial market disruptions."
Fed officials have made clear that they are a long way from contemplating a reduction in rates below zero in their benchmark overnight policy rate. Some, though, have suggested they’d be more open to such a move than in the past should the economy deteriorate significantly.
The central bank left its target range for the federal funds rate unchanged at 0.25 percent to 0.5 percent last week after raising it in December for the first time since 2006.
U.S. policy makers decided against pushing rates below zero during the financial crisis partly because of concern it could lead to dangerous dislocations in the money markets.
European Experience
Since then, the European Central Bank and the central banks of Switzerland, Sweden and Denmark have nudged some official lending rates negative without such repercussions, and Fed officials have publicly taken note.
The Bank of Japan became the latest monetary authority push rates into negative territory last week in an effort to spur lagging growth and increase too-low inflation.
Former Fed official Roberto Perli cautioned against drawing conclusions about future Fed actions from the inclusion of negative U.S. rates in the stress test scenario.
"It doesn’t signal anything" about future monetary policy, said Perli, a partner at Cornerstone Macro LLC in Washington.
Nevertheless, it is "another sign that the Fed would not be entirely adverse" to reducing its target rate below zero should economic conditions warrant, he said.
Bill Dudley
New York Fed President William Dudley said last month that policy makers were "not thinking at all seriously of moving to negative interest rates.
"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," he said on Jan. 15.
Fed Vice Chairman Stanley Fischer said Monday that foreign central banks that had resorted to negative interest rates to stimulate their economies had been more successful than he anticipated.
“It’s working more than I can say I expected in 2012,” he told the Council on Foreign Relations in New York. "Everybody is looking at how this works," he added.

Negative rate means they penalize the bank if they don't give out loans at the lower rate they publish

I know its a "test", but I'd say the Fed would move to another round of quantitative easing first. Creating electronic money is just so much fun!

That's for the borrower. It's is intended to stimulate buying stuff. For those saving, it means paying .5%. You put in a $100...you get $99.50 back.

Having talked to two people this week about refinancing my house, it would sure be nice if they paid me to do it!

We already don't put money in the bank at times... whats the point.. you get almost nothing back...

If you were to pay I have no clue where the bank would get money to lend with, I'd certainly pull every last penny of ours....

I didnt read what Pat posted, but from your response, it sounds similar to what Slick Willy and Reno pulled with the banks and the housing market... loan the money or you'll be penalized.

Rost: "I have no clue where the bank would get money to lend with" The same place they get it now at 0% interest (Fed overnight lending rate) - your government. That is why your getting less than 1% interest on your savings. We are competing with our own tax dollars. Competing with the money printing machine is a losing bet.

No. A negative interest rate is the bank charging the depositors for keeping their money in the bank. It is a risky method that tries to spur borrowing and ignite a faltering economy.

Banks aren't in the business of losing money.

It'll come from somewhere.

I'd move my money to cash...or gold.

Bank savings accts are paying almost nothing. If you do need one, check out capitalone360.com. It's an online bank that pays a lot more. Currently, passbook saving is paying .75% which is close to nothing but it's far more than the .01 paid by a lot of banks. Their CD's are quite a bit higher, too, as much as 2% for 5 year CD's.

They have no brick & mortar banks, it's all online. It works just the same as doing your banking online with any other bank. I've been using them for over 15 years without a hitch.

They start that and my accounts will be closed down before end-of-day..

If they know a decrease in purchasing power is happening they're paying you a little bit to share the loss with them.

It looks like you have more (dollars) but you actually have less (actual worth).

As will anyone that has half a clue, which will result in 1929 all over again. By design, this time. When that happens, the .gov will step in to "rescue" the banks by nationalizing them, and then to "save Social Security" they will nationalize and seize all retirement accounts (except the .gov ones, of course).

The .gov already controls the healthcare via ObamaCare and the looming single payer system. The Fed manipulation of the interest rates into the negative will create the "crisis" necessary for the .gov to justify the theft of all retirement assets and thereby the income of all those who are, or ever plan to, retire.

The Constitutional Republic will have been reduced to a socialist oligarchy.

The worst part of that scenario is what it does to pension funds

Many of them go belly up

And ss is not far behind. Course it's broke already. Paid in 15% for 30 years and looks like I'll never see a dime of it


I'm telling you the only possible cure is to either hang or enslave politicians


I could be ok with that I suppose

If they sent a current or retired politician to do my yard work

Time for cash under the mattress.

The dirty little secret they aren't telling anyone is that there is so much debt out there, there actually isn't enough cash in existence for people to pull their money out of their accounts. That was the true underlying issue during that 2008 crisis. Real money liquidity levels were falling too low and they didn't know how to do with it. If they do this and people start running to the bank, many of them may find all their accounts are locked due to insufficient funds. I actually have about a grand in cash in the house and am taking more out each pay day just in case. Worst case scenario, nothing happens and I put it back in the bank in a year.

-Rob

You had better start now..

The next move after negative interest rates:
http://www.zerohedge.com/news/2016-01-31/bloomberg-op-ed-calls-end-cash

Banks never have enough money on hand to cover their deposits. Course most people owe more then they have in savings, so in the big picture everyone is screwed.