When discussing negative interest rate policy, the U.S. Fed isn’t normally the variety of prospective central banks that are prone to deploy negative rates.
New York Fed President William Dudley recently said that any suggestion the Fed may go negative is “premature.” Speculation about who might be alongside go negative remains increasing this year performing a Bank of Japan’s adoption of negative rates in January.
There are unique hurdles to implementing negative rates inside the U.S. in comparison with another countries, particularly due to the information on the $2.6 trillion locked in constant value, dollar-in-dollar out money market funds. The Fed has warned before that negative rates could disrupt the marketplace, which assists fund banking institutions in the united states.
But Citi notes the Fed could conceivably protect the MMF market by shielding it from negative rates of interest, much like what’s been completed in a few Europe to safeguard bank profitability inside a negative rate environment.
So in the event that obstacle was removed, would it not seem sensible whatsoever for that Fed to consider the insurance plan?
Not inside the near-term, says Citi, however, once the current low rate, low inflation environment continues, the Fed might be instructed to go negative somewhere later on.
“When the Fed choose to ease monetary policy within the near-term (say, within the next Six months), we suspect it would choose forward guidance or, performing a 25bp rate cut, further asset purchases (QE),” said Citi analysts within the note.
If that’s not enough to stoke the economy, inside the medium-term, Citi sees negative rates like a “regular feature” of U.S. monetary alongside further asset purchases.
