A coming economic decline may push the Federal Reserve to set interest rates below zero — that is, banks would be charged for holding cash at the central bank — in a frantic attempt to revive growth.
That’s the latest prognosis from Albert Edwards, global strategist at Societe Generale, who said he and fellow market bear Bob Janjuah, a senior adviser at Nomura Securities, recently mused over the possibility of rates bottoming at -5 percent.
That would mean replacing zero interest rate policy, or ZIRP, with negative interest rate policy, NIRP, in order to encourage bank lending.
“The next U.S. recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed,”
Alberts said in a Sept. 24 report obtained by Newsmax Finance. “It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the U.S.”
The Fed has held rates near zero percent since December 2008 when the U.S. economy declined the most since the Great Depression. The following period of weak growth pushed the central bank into several rounds of “quantitative easing,” or buying bonds on the open market to pump more cash into the financial system.
Lower interest rates make it cheaper to borrow, which can help to boost spending and investment.
Negative rates have been tried in other countries such as Switzerland, Sweden and Denmark to boost lending or to stabilize currencies. The European Central Bank last year instituted NIRP before changing course to quantitative easing like the Fed and the Bank of Japan.
U.S. banks such as JPMorgan Chase this year resorted to negative rate policies by
charging large customers for holding their cash.
Losing Credibility
Since the Fed last week decided to hold rates
near zero the S&P 500 declined about 2 percent, a possible indication that the central bank is losing credibility among investors.
The Fed’s Sept. 17
statement cited concerns about “recent global economic and developments” — without mentioning China’s stock market
crash and slowing growth — which added more layers of complexity for analysts to fathom.
Edwards sees worrying signs for the economy, especially in the corporate bond market. Credit spreads, or the difference in yield between two bonds of similar maturity but unequal quality, are widening as investors grow concerned about corporate borrowing.
“Clearly the heavy
issuance of debt we have seen in recent years to buy back equity is beginning to prompt an investor revolt — typical towards the end of an economic cycle,” Edwards said. “U.S. companies are levered up like never before.”
Meanwhile, China’s economic growth has slowed to a crawl in the critical areas of construction and
manufacturing that require raw materials from other countries such as Brazil, Russia, Australia, Saudi Arabia and Indonesia.
“Things will get much, much worse,” Edwards said. “But the key message is that when it comes to things that matter to the rest of the world, China has already hard landed!”