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1/Well, this seems like a bad idea. The crux of Kocherlakota& #39;s argument is that, if the Fed does not go negative, "...the Fed is giving up on unemployment reductions to help keep banks and their shareholders safer." https://www.bloomberg.com/opinion/articles/2020-04-24/coronavirus-economy-the-fed-should-go-negative-next-week">https://www.bloomberg.com/opinion/a...
2/So, Kocherlakota thinks that a reducing the fed funds target range by 25 basis points, to -0.25% to 0% would reduce unemployment significantly, as people would spend more, and that would increase aggregate activity. The negative effect he discusses appears to be a squeeze...
3/on banks. First the potential positive effects. Of course, interest rate reductions can& #39;t have any effects on investment spending, or purchases of consumer durables right now. Most construction is shut down, as are the auto plants. I can& #39;t buy a refrigerator, even if I...
4/wanted one. I& #39;m not sure what consumption I might be able to move from the future to the present in response to this interest rate cut. Even at the best of times, a 25 basis point interest rate cut won& #39;t do much. So any beneficial effects are likely nonexistent. But, the...
5/negative effects are real. The state of the financial system is somewhat precarious. Loan portfolios can& #39;t be bringing in a lot of income for banks. If we added to that negative interest rates on a large stock of bank reserves that is growing by the day, that would cut...
6/significantly into bank profits. Central bankers (e.g. Bank of Japan) have devised schemes to mitigate that problem, for example, by charging negative interest only on marginal reserve holdings. But, if a negative interest rate program is working, it reduces all interest...
7/rates, so the rates of return on all bank assets fall. The key issue is that banks are then reluctant to reduce deposit rates, particularly for small depositors, as those depositors can always flee to zero-interest currency. So, banks& #39; profit margins have to fall...
8/But Kocheralokota says we shouldn& #39;t care, as that just affects bank shareholders, Bank CEOs, and other unworthy folks. Of course, we learned in the financial crisis that the health of the financial sector is a concern for everyone. If it fails, we all hurt. So, for the Fed...
9/there& #39;s no up side to going negative right now. Negative interest rates are not popular with the public, and the Fed will have a lot of explaining to do, which is just a distraction from far more pressing issues. Bottom line: Things not to worry about for the time being...
10/ are, among other things: (i) central bank interest rate targets; (ii) inflation targets. The Fed& #39;s lending and asset purchase programs, and how to conduct those, are infinitely more important.
