Episode 25: Negative Rates -- Another (Delayed) 2008 Hangover

Episode Summary

Executive Summary: The episode explains negative interest rate policy (NIRP), why central banks are using it, and what could happen if the U.S. Federal Reserve ever adopts it. Guests argue NIRP is a last-resort tool to push banks to lend and stimulate growth in a low-inflation world, but it may weaken banks, distort financial intermediation, and have uncertain real-economy effects.

Main Topics: What negative interest rates are (Priority: 5/5): The hosts and guest define NIRP as a policy where central banks charge commercial banks for holding excess reserves, unlike the overnight benchmark lending rate. It is framed as a reversal of normal banking incentives. Why central banks adopted NIRP (Priority: 5/5): NIRP is presented as a Hail Mary response after traditional rate cuts and quantitative easing failed to generate enough inflation or growth following the financial crisis. Effects on banks and consumers (Priority: 5/5): The discussion explores how banks may absorb negative rates rather than pass them fully to depositors, fearing cash withdrawal, money hoarding, or movement into alternatives like money funds. International experience and early evidence (Priority: 4/5): The episode reviews Europe, Scandinavia, Switzerland, Denmark, and Japan, noting modest market impacts, weaker bank stocks, lower bond yields, and unclear evidence that NIRP materially boosts growth. Risks to financial stability (Priority: 5/5): A central concern is that prolonged negative rates could damage bank profitability and alter the basic model of deposits and lending, creating long-term instability rather than stronger growth. Could the Fed use NIRP? (Priority: 4/5): The conversation turns to whether the Federal Reserve would ever need or be legally able to adopt negative rates. The guests note the Fed has studied it, but it would be a major market shock in the U.S.

Key Arguments: Negative interest rates are designed to penalize banks for holding excess reserves and encourage lending into the economy. Central banks turned to NIRP because conventional tools, including near-zero rates and quantitative easing, had limited success in raising inflation and growth. The policy may be less effective over time because banks are stronger but more constrained by new post-crisis rules and a changed financial system. Consumers are unlikely to face deeply negative deposit rates immediately because banks fear losing deposits to cash or other assets. The European experience suggests NIRP has not clearly delivered stronger growth, while bank profitability has been squeezed. Japan’s adoption made NIRP feel mainstream and forced U.S. policymakers and markets to treat it as a real possibility. The U.S. has more alternatives than many countries, including further QE, rate cuts, or regulatory changes, before resorting to NIRP. If the Fed ever adopted NIRP, the impact could be different from Europe or Japan because the dollar and Treasuries play a global safe-haven role.

Data Points: Policy threshold: Below zero - Defines negative interest rate policy as rates below the zero lower bound Central banks using NIRP: Eurozone, Sweden, Denmark, Switzerland, Japan - Examples cited as part of the negative-rate club BOJ policy start: January 29 - Date the Bank of Japan joined the negative-rate group Podcast episode date: Thursday, February 18 - Recorded date stated at the start of Bloomberg Benchmark Global assets on central bank balance sheets: $23 trillion - Guest cited the scale of assets accumulated through quantitative easing and central bank holdings U.S. excess reserves: Well over $2 trillion - Banks’ excess reserves at the Federal Reserve were highlighted as a sign of weak lending incentives Most negative rates discussed: Minus 25 to minus 50 basis points - Typical modest negative-rate levels in many countries Sweden rate move: Much lower than peers - Described as a market-shocking deeper negative-rate move U.S. potential lower bound cited in study: Minus 4.5% - A study suggested the U.S. could theoretically go that low, alarming the guest Share of global economy under NIRP: One quarter - Claim that about a quarter of the global economy is now run by central banks using negative rates Japanese bond yield outcome: Slightly negative 10-year JGB yield - Market reaction after BOJ action Japanese consumer poll support: 13 people said yes - Local poll found only 13 respondents thought NIRP would spur the economy

Pivotal Quotes: "this is sort of like, you know, I'm picturing the D.C. metro here, and we have the boxes in the cars where you have, like, the glass, and you pull down a lever in case there's, like, a giant emergency. That's what NERP is for central banks." — Dan Moss: Explaining NIRP as an emergency, last-resort policy tool "I think the fundamental problem the central banks are throwing everything they've got at trying to get inflation up and growth moving, and the financial system is just not responding." — Karen Shopitro: Summarizing why central banks keep experimenting with unconventional policy "I think nothing would be awful, but they've got a choice of additional tools." — Karen Shopitro: On whether central banks can simply do nothing in the face of low inflation and weak growth

Implications: NIRP is no longer a fringe idea, but it remains risky and uncertain. For investors and banks, the main watchpoints are profitability, deposit flight, bond yields, and whether the Fed ever treats negative rates as a real contingency.