I've spent a lot of time throwing rocks lately, so I'm going to try and be a little constructive and talk about negative interest rates.

The #NIRPening, a thread. 1/x

A central bank may seek to set o/n rates below zero, a new post-GFC approach.

Sweden's @riksbanken did in 2009
Denmark's @nationalbanken did in 2012
Europe's @ecb did in 2014, most famously 2/x

The basic pro-argument is that #NIRP alters the tradeoff btw consumption and savings sharply in favor of the former AND encourages cheap borrowing and investment. 3/x

The basic con-argument is that #NIRP screws up the financial system, destroys banks, and harms savers. 4/x

These arguments are basically too simplistic. #NIRP does some good and does some harm. The good could be > harm, or it could not be, owing to the circumstance. 5/x

Here in the U-S-of-A, there's probably a better case to be made that #NIRP does more harm than good, owing mainly to the highly financialized nature of our economy, second only to Suisse. 6/x

Our very own Federal Reserve has said they don't want #NIRP. JayPow will likely repeat that remark when he speaks at @PIIE Wed morning. While economic circumstances may change, my contention is that this desire is based on economic/market structure, not circumstance. 7/x

The best evidence for this comes from Sims Wu (2019) paper presented at @ChicagoFed conference June of last year (link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3344490); I'll summarize. 8/x

(Wu, go Fighting Irish!, was also author of the Wu-Xia shadow rate during the Bernanke Fed years)

Basically, Sims Wu (2019) built a model of extraordinary monetary stimulus that included second-order effects, such as risk of bank failure, which led them to generate a hierarchy of "what is likely to work" for different economies, including US. 9/x

Their conclusion for the US was (from memory):
1) Cut to 0%
2) QE
3) Other LSAPs <--- We're here May 2020
4) Forward guidance
5) Yield curve control lite
6) Yield curve control heavy
7) #NIRPening

Negative rates are last on the list. 10/x

Papers from @ChicagoFed conf aren't random. They're curated evidence of how policymakers are thinking. Reason Sims Wu (2019) advocated against #NIRP in their model was that it increased risk of bank failures, which IS A REALLY BAD THING IN HEAVILY FINANCIALIZED ECONOMY! 11/x

Could the #NIRPening come to the US? Maybe someday, but it's not likely in the foreseeable future.

The key insight for markets is that term rates can't go persistently negative in a currency if CB o/n rates won't go negative. It's just bond math and roll down yield. 12/x

What would have to change for #NIRP to be more likely? A few things could:

A) Reduced financialization of US (hah)

B) Attempts by the Fed to use guidance and YCC with no material change in deflation risks 13/x

A would take decades and B would take AT LEAST 24m, (policy acts w/long and variable lags). It's 5-6 more months before @federalreserve knows what they've done SO FAR works, 3-6m to implement guidance, 12m after that to try YCC, and 12m after that to contemplate #NIRP. 14/x

Fret, worry, teeth gnash, and buy 1yr fed funds futures all you want. Pricing in the #NIRPening in 12 months simply doesn't make sense, and pricing it in at all is far, far less than a 50% chance. Fin.