The benefits of a negative US interest rate may outweigh the costs, JPMorgan says

Source: Finance Insider 2020-05-15

While it's still improbable that the Federal Reserve will soon adopt a negative policy rate, it might be beneficial if it were to happen, according to JPMorgan.

"Mildly negative rates such as -10bp for a year or two could be beneficial in the current conjuncture," wrote a team of strategists led by Nikolaos Panigirtzoglou in a Tuesday note.

JPMorgan said that it views a negative US rate as "unlikely," according to the note. Still, the rate would only need to be "mildly negative" for a short period of time - less than two years, Panigirtzoglou said - for the benefits to outweigh the costs.

Negative rates have again become a topic of debate as the Fed-funds futures rate last week began to price them in for the end of the year. Still, Federal Reserve Chairman Jerome Powell has long said that the central bank will use other policy tools at its disposal amid the coronavirus pandemic.

On Tuesday, President Donald Trump revived an old Twitter battle urging the Fed to adopt negative interest rates, this time calling them a "gift" that other countries are benefiting from.

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JPMorgan argued that the US could see a similar outcome as Europe after the European Central Bank slashed rates to negative 10 basis points in June 2014. Following the cut, "there was a significant increase in the pace of Euro area credit creation in the aftermath of deposit rates moving into modestly negative territory," said Panigirtzoglou.

He continued: "This reduction in fragmentation and easing in Eurozone funding conditions outweighed the negatives at the time from a shrinkage of the euro money fund industry as well as the reduction in interbank market activity."

There could be similar benefits in the US, to Panigirtzoglou. The report also argued that another benefit of the slightly negative rate could be that the search for yield could spread beyond money markets to bond markets, boosting high-quality corporate and mortgage bonds.

He also said that "less healthy banks" could see significant easing in their funding conditions after a Fed policy rate cut to negative due to the intense search for yield.

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The benefits of a negative US interest rate may outweigh the costs, JPMorgan says

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