“Donald Trump is not known for the keenness of his macroeconomic insights,” says Eric Levitz in New York magazine. So when the US president urged the Federal Reserve to “accept the GIFT” of negative interest rates, you “might have reasonably interpreted his proposal as the cockamamie fantasy of a certified crank”. Nonetheless, futures contracts linked to interest rates are already implying that the Fed will cut its benchmark interest rate below zero by mid-2021.
Several major central banks have embraced negative rates, including the Bank of Japan and the European Central Bank. The latter “thinks its experiment has worked”, says Richard Beales on Breakingviews. “It reckons the policy has generated growth and inflation … and made its overall stimulus package work better.” But the heads of the Fed and the Bank of England say they favour other monetary-policy tools (although UK officials confirmed this week that they are looking at how negative rates would work).
For all its reluctance, the Fed will eventually go down the same path, says Albert Edwards of Societe Generale. The “ridiculously strong” US dollar and the deflationary impact of such an overvalued currency will inevitably force it to take extreme monetary measures to drive down the exchange rate. With rates in the eurozone and Japan set to remain firmly negative, “it would simply be bonkers for the US not to compete on this playing field”.
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