Powell Says Negative Rates Aren't at Top of Fed's List of Tools

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Federal Reserve Chairman Jerome Powell said he doesn’t think the central bank will look at using negative rates.

“I just don’t think those will be at the top of our list,” Powell told reporters at a press conference Wednesday after the Fed lowered its federal funds rate target by a quarter percentage point to 1.75% to 2%.

“Negative interest rates is something that we looked at during the financial crisis and chose not to do," he said. “We did not use negative rates, and I think if we were to find ourselves at some future date again at the effective lower bound -- again not something we’re expecting -- then I think we would look at using large-scale asset purchases and forward guidance.”

A handful of central banks – in Denmark, the euro zone, Japan, Sweden and Switzerland – have pushed interest rates below zero.

Earlier this month, the European Central Bank lowered its deposit rate by 10 basis points to minus 0.5% as part of a wide-ranging package to prop up the region’s faltering economy and lift depressed inflation.

President Donald Trump has urged the Fed to emulate their example and push rates into negative territory. In a Sept. 11 tweet, he called on the Fed to “get our interest rates down to zero, or less,’’ arguing that the move would allow the U.S. government to bring the cost of servicing its debt “way down.’’

The Fed studied the possibility of lowering rates below zero in the 2008-2009 financial crisis and its aftermath and found it “wanting,” Vice Chairman Richard Clarida told a Bank of France event in March.

Indeed, in an August 2010 memo, Fed staff members questioned whether the central bank had the legal authority to set negative interest rates in the U.S.

The Fed in 2008 gained authority from Congress to pay commercial banks interest on reserve balances deposited at the central bank. It’s not clear whether that authority extends to establishing negative rates on those reserves.

In the 2010 memo, Fed staffers also raised concerns about the impact that sub-zero rates would have on banks and money market funds.

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