Fed’s Kaplan Skeptical That Negative Rates Are ‘Viable’ in U.S.

(Bloomberg) -- Negative interest rates could be harmful for U.S. banks, limiting their usefulness as an emergency tool in an economic downturn, said Federal Reserve Bank of Dallas President Robert Kaplan.

“I’m a skeptic about whether that’s a viable option,” Kaplan said Thursday at an event in Dallas. He was responding to a question citing a recent study by a San Francisco Fed economist, which found that negative rates could have spurred a faster U.S. recovery after the Great Recession.

Fed’s Kaplan Skeptical That Negative Rates Are ‘Viable’ in U.S.

The “big worry” would be “the impact on the financial system and the ability of financial intermediaries to actually be healthy and function,” Kaplan said.

Negative rates -- deployed in Europe and Japan in the aftermath of the financial crisis, though not in the U.S. -- are getting a second look from other researchers as well.

The International Monetary Fund published a blog on Feb. 5 examining how to make them work for central banks. It noted that rates historically have been cut by between 3 and 6 percentage points in a severe downturn. That means with rates still low globally, they could quickly be back at zero in the event of another slump.

“I have long thought the next recession would trigger the adoption of helicopter money and deeply negative Fed Funds,” wrote Societe Generale SA global strategist Albert Edwards in a note on Thursday. “Clients have been skeptical of the latter because of the negative impact on bank margins, but now I am more convinced than ever that we will see negative Fed Funds.”

At the Fed, U.S. policy makers have been far less taken by the theoretical benefits of charging savers to keep their cash in the bank. Kaplan’s warning highlights a longstanding concern that negative rates in the U.S. could deepen a downturn by triggering a painful credit crunch, as the country’s thousands of small banks struggle to stay in business.

This view got back-up recently from former U.S. Treasury Secretary Lawrence Summers, who’s signed on to a paper that warned negative rates could make matters worse by compressing bank profits.

They might also be in breach of U.S. law. Fed officials were advised during the crisis that they may lack the authority to impose negative rates in the U.S., because legislation allowing them to pay banks interest on excess reserves may not permit them to reverse that flow by charging interest.

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