A tight spot: US Fed could learn from ECB, Swiss National Bank, Germany and now Japan's move into negative interest rates

Wednesday’s statement of the Federal Open Market Committee should be read as a mea culpa.

“Four hikes in 2016??? Ha. The economy is a lot more fragile than we thought,” the statement seemingly says.

It doesn’t, of course. But it says, quoting correctly this time, “economic growth slowed late last year.” Yes, the economy seems to be growing at a “moderate pace,” but no longer are the risks balanced between an economy picking up steam and one slowing further. Business investment, called “strong” last month, is now “moderate.”

And, oh, that stock market? The Fed noted it was closely monitoring “global economic and financial developments.”

That’s not the same as saying the Fed will forever prop up your 401(k), but it’s saying the central bank is showing concern over it.

How do negative interest rates work?

A central bank uses its deposit rate to influence how banks handle their reserves. In the case of negative rates, central banks want to dissuade lenders from parking cash with them. The hope is that they will use that money to lend to individuals and businesses, which in turn will spend the money and boost the economy and contribute to inflation.

It is also aiming to force investors to shift money out of bank accounts and into higher-yielding assets.

So this has been done elsewhere?

The European Central Bank in June 2014 was the first major central bank to venture into negative territory followed by the Swiss National Bank in December 2014. The Danish central bank has also employed negative rates to defend its currency’s peg to the euro, while Sweden’s rates are also in negative territory.

And former Federal Reserve chief Ben Bernanke has said that in the event of a serious downturn, negative interest rates are a tool that the U.S. central bank should consider.

Also read:

German bond yields went to negative recently, ECB made same move, US bonds may follow soon. What it indicates for the world economy?
http://drkhalid.blogspot.in/2016/01/german-bond-yields-went-to-negative.html

Martin Feldstein, a prominent Harvard economist says Fed should let the market fall and keep hiking rates.http://www.marketwatch.com/story/feldstein-says-fed-should-let-the-market-fall-and-keep-hiking-rates-2016-01-27

Do negative interest rates create jobs?
http://drkhalid.blogspot.in/2016/02/do-negative-interest-rates-create-jobs.html

Ref:
http://www.marketwatch.com/story/a-lesson-for-the-fed-in-the-bank-of-japans-move-2016-01-29

http://www.marketwatch.com/story/what-you-need-to-know-about-the-bank-of-japan-and-negative-interest-rates-2016-01-29