Implementing negative interest rates might be a “reasonable” option for the Federal Reserve if the economy runs into trouble, former Federal Reserve Chairman Ben Bernanke said Friday.
Bernanke’s comments, posted on his personal blog at the Brookings Institution, addressed a possibility that has been on the minds of investors but that Fed Chairwoman Janet Yellen and other members of the Fed have sought to downplay.
In a long post assessing the strengths and weaknesses of instituting negative rates, Bernanke concluded that, in a scenario in which the economy weakened and the Fed had already cut short-term interest rates to zero, a “policy of modestly negative interest rates might be a reasonable compromise between no action and rolling out the big QE gun.”
The “QE gun” is a reference to quantitative easing, the practice of the Fed buying bonds in large quantities, pushing down not just short-term interest rates but also rates on securities of longer durations. As chairman of the Fed during the financial crisis, Bernanke oversaw several large rounds of quantitative easing.
Since Bernanke has left office, other central banks increasingly have turned to negative interest rate policies to supplement or substitute for quantitative easing. With negative rates, lenders essentially pay borrowers to take their money, rather than the other way around. Lenders might accept such a situation because they cannot easily store large amounts of cash without incurring large costs for security, storage, and so on. The central banks of the euro area, Japan, Sweden and Switzerland have pushed certain short-term interest rates below zero, to levels previously not thought possible.
Such a policy could create problems in the financial plumbing of U.S. markets, a possibility Bernanke addressed in his post. Fed officials have faced numerous questions about whether they have contingency plans for imposing negative rates from concerned investors and lawmakers.
In a press conference Wednesday, Yellen brushed off talk of negative rates.
“What I would like to make clear is that this is not actively a subject that we are considering or discussing,” Yellen said in response to a question about whether the Fed would turn to negative interest rates if economic growth turned negative.
Currently, the Fed expects the economy to improve and for interest rates accordingly to go up, not down, she explained, adding that “we are not spending time actively debating and considering things we could do for additional accommodation and certainly not actively considering negative rates.”
