If you think that the Federal Reserve might announce negative interest rates that might seem like a far fetched idea but banks are being told to prepare for uncertainties as per the market conditions. This might be one of the few times when US central bank as well as the governing agency is included stress tests in order to consider the possibility of Treasury rates becoming negative. Till now the situation is considered as hypothetical. However, it definitely showcases a scenario where zero rates are not enough and these could soon morph into negative rates as well. This is an outcome of nations trying to devalue their currencies as compared to other nations. A nation that is in economic slump might think that the best way out of the situation is to reduce the value of its currency in the forex market. It does so by making its exports cheaper and attracting currencies that have higher yield in the market and more buying power.
Effect of lowering of interest rates
When a country sees success in this strategy, others wish to emulate the same. As more and more countries follow the same strategy, central banks keep devaluing their currency and hence, negative rates soon become a possibility. With such a scenario occurring worldwide, about a third of sovereign debts have negative yields in the market. Soon, the expert led growth policy which was considered to stimulate lending becomes an ineffective tool. This is the case with Japan right now. Today zero interest rate policy has become a negative interest rate policy. It is no longer a hypothetical situation. It is a possibility and the fate of a central bank system which is facing a slow global economy. Japan has adopted the negative interest rate policy last week and hence, US Federal Reserve could soon follow suit. This reflects the current policy stance of most central banks in order to counter falling demand and weaknesses in the global economy. It is not a very reassuring scenario and exports do not have much faith in the stock markets being pulled back to position by this stance. However, with US Feds having raised interest rates, if it needs to change its stance again, it would seem like defeat for them.
Negative interest rates
However, with the current market scenario, many high ranking officials are considering the proposition. The Fed vice chairperson stated that the negative rate experimentation by Europe was working well and that has led to the US Feds considering going the same direction. With interest rates going into the negative zone, this would lead to banks finding it hard to store reserves and hence, pushing the money out in the economy in order to stimulate growth. It might work as per theory and as per Europe’s feedback, but there would be associated problems seen as well. Here is an Article where you will find Information about the US Economy, which is needed for investors. These are signals that determine the state of investment in an economy and should not be ignored.