President Donald Trump now wants the Federal Reserve to lower interest rates to zero or lower. But he should consider the minus of negative interest rates, which failed to drive strong growth in Europe and Japan and would likely cause a firestorm among US savers.
Meanwhile, stock market investors should note that this month's rally has come bond yields have reversed some of the recent sharp declines.
In his latest move to the central bank, Trump tweeted on Wednesday : “The Federal Reserve should get our interest rates down to zero, or less, and we should then start refinancing our debt. CLEANING COSTS MAY BE DOWN THE WAY DOWN, while significantly extending the term. "The president ends by calling the Fed" bonehead "for not following other central banks at negative interest rates.
That is the self-proclaimed opinion of the King of Debt. "As a highly leveraged real estate developer, Trump is considering negative interest rates from the borrower's perspective," writes Paul Ashworth, US manager at Capital Economics.
But the Fed has, at best, been lukewarm about such an opportunity, "partly because officials know it can cause riot among savers and drag the central bank into a political maelstrom," he adds. Money market funds could also see large-scale outflows, which could disrupt short-term financing for companies, banks and perhaps even the Treasury.
In addition, the registration of negative interest rates in the euro area, Sweden, Denmark, Switzerland and Japan has been mixed, Ashworth continues. While bond yields have fallen below zero, banks were reluctant to impose negative interest rates on depositors, resulting in a squeeze on their profits.
Trump believes that the United States deserves to have subzero interest rates because it has "a fantastic currency, power, balance sheet." In fact, negative interest rates reflect the economic economy of Europe and Japan. By contrast, US interest rates were the highest in real terms (ie after adjusting for inflation) when it was "Morning in America" in the mid-1980s.
Long-term government bonds briefly touched 14% in May 1984 – as much as 10 percentage points above inflation. Now the real return on securities protected securities is just over zero. Ten-year TIPS yield 0.14% while 30-year TIPS yield 0.56%. After taxes, which are collected annually for the inflation adjustment, these returns are already below zero.
Unlike last year, Trump's Fed basing now seems unfounded. Last October, when the central bank was about to raise its policy rate and shrink its balance sheet, and the stock market was moving into the correctional area, I wrote that the president had a point in criticizing the central bank for being too tight
Now the Fed prepared to lower its target interest rate from federal funds from the current range of 2% -2.25% at next week's meeting of the Federal Open Market Committee. The futures market with redeemed funds sets a 88.8% probability of a 25-point cut – a quarter of a percentage point – then a 72.3% probability of a further 25-point reduction or more at its December meeting. The Fed has also finished shrinking its balance sheet.
At the same time, the stock market has rallied, with
which took about 3000 levels on Wednesday for the first time since July 30. It left the benchmark just 0.82% shy of its record and up 2.54% since the start of the month. The
Dow Jones industrial average
was only 0.81% from its peak time,
The September rally has also been marked by an even more remarkable rotation from the market's previous winners, especially dividend-paying, slowly growing defensive stocks, at their value.
While bond yields have disappeared from recent days, with the Treasury's 10-year banknote trading to 1.749% late on Wednesday, up from 1.461% on September 3, it coincided with the stock market's September rally, which has been led by industries and the economy. A more upward sloping yield curve is also a positive economic sign.
Be careful about what you want when you demand zero or negative interest rates, Mr. President.
Write to Randall W. Forsyth at [email protected]