Staying Positive

February 17, 2016

2 minute read

Staying Positive

by Benjamin Streed, CFA, Fixed Income, Raymond James

February 16, 2016

We’ve written about negative interest rate policies (NIRP) but the events of the last two weeks are changing the dialogue here in the US. The combination of Japan moving to negative rates paired with Fed Chair Janet Yellen’s recent testimony to Congress has led many to wonder whether the Fed will mimic other central banks and implement NIRP here at home.

Much of Yellen’s testimony centered on the central bank’s ability to combat future recessions and what tools it had available to do so should growth in the US stall. Simply put, it is way too early to speculate on the Fed cutting rates all the way into negative territory after it has only just begun its “liftoff” from the prolonged zero percent anchor we’ve seen since the financial crisis. So where is this speculation coming from? It would seem the responsible thing to do after seeing other major global economies implement NIRP would be to include its possibility, however remote, into our bank risk models in the US.

Instead of being rational, the media cherry-picked the sensational piece of the criteria for this year’s bank “stress tests” for which now includes a prolonged negative rate on T-bills. Humorously, the media also forgot to include the critical facets of the test that include a “severe global recession, accompanied by a period of heightened corporate financial stress.” You are not alone if that scenario sounds worse than negative T-bill yields. Of course, there have been numerous “adverse scenarios” tested since the Fed began the Comprehensive Capital Analysis and Review (CCAR) program in 2011 after the passage of the Dodd-Frank act, but the media sure likes the shock and awe of negative rates.

William Dudley, President of the Federal Reserve Bank of New York, made it abundantly clear that the Fed had no wish to utilize negative rates and noted, “There are a lot of things we would do long before we would really think about moving to negative interest rates”. Given the ongoing volatility overseas and the lack of inflation, markets are predicting the Fed will refrain from another rate hike at its March meeting. Bloomberg futures data show a zero percent chance of a hike next month. Any thoughts of NIRP here in the US should be ignored; the Fed is still being accommodative in monetary policy, even if they surprise us with a hike.