While President Donald Trump’s criticism of the Fed is not exactly news, there is a new wrinkle — he recently urged not only low rates but that the Fed should “get our interest rates down to ZERO, or less,” Bloomberg and others are reporting this week. “We should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,” the President tweeted.
Bloomberg quickly called the idea “flawed” and noted that “while it’s true that the government could sell bonds at lower interest rates than those on much of its outstanding debt, it would have to pay a big premium to buy back and retire some old bonds, effectively negating the financial benefits. Certain mature treasuries, for instance, fetch prices of as high as $1.40 for every $1 of face value.”
The report also noted that the current federal funds target rate is already on a track to be lowered following a quarter-point reduction on July 31 — the first cut since the Fed lowered rates effectively to zero in 2008, during the worst financial crisis and economic downturn since the Great Depression.
Barrons weekly newsletter published by Dow Jones and Company went into even more detail but agreed that negative rates likely would bring their own problems.
Barrons cited industry views that the call for negative rates reflects the view of the self-proclaimed “King of Debt” and thinks the President’s view “that of a highly leveraged property developer…thinking about negative rates from the perspective of a borrower.” It cites especially comments by Paul Ashworth, chief U.S. economist at Capital Economics.
He notes that the Fed has been lukewarm at best about such a possibility, “partly because officials know that it could cause outrage among savers and drag the central bank into a political maelstrom.” Money-market funds also could see large-scale outflows which could disrupt short-term funding for businesses, banks, and perhaps even the Treasury.
Moreover, the record of negative rates in the euro zone, Sweden, Denmark, Switzerland, and Japan has been mixed, Ashworth continues. While bond yields have fallen below zero, banks been reluctant to impose negative rates on depositors, resulting in a squeeze on their profits.
Trump has said that the U.S. deserves to have subzero interest rates since it has “a great currency, power, balance sheet.” In fact, negative interest rates reflect the economic torpor in Europe and Japan. By contrast, U.S. interest rates were at their peak in real terms when it was “Morning in America” in the mid-1980s, Barrons said.
Long-term Treasury bonds briefly touched 14% in May 1984 — a full 10 percentage points above inflation. Now, real yields on Treasury inflation-protected securities are just above zero. The 10-year TIPS yields 0.14% while the 30-year TIPS yields 0.56%. After taxes, which are levied annually on the inflation adjustment, those yields already are below zero.
Unlike last year, Trump’s Fed bashing now seems unfounded, Barrons thinks — since the bank is already poised to cut its federal-funds target rate at next week’s meeting of the Federal Open Market Committee. The fed-funds futures market puts an 88.8% probability of a cut of 25 basis points then and a 72.3% probability of a further reduction of 25 basis points or more at its December meeting. The Fed also has ended the shrinkage of its balance sheet, the report said.
Meanwhile, the stock market has been rallying, with the S&P 500 retaking the 3000 level Wednesday for the first time since July 30. That left the benchmark just 0.82% shy of its record and up 2.54% since the start of the month. The Dow Jones Industrial Average was just 0.81% away from its all-time high.
The report concludes, “be careful what you wish for when calling for zero or negative interest rates, Mr. President.”
So, we will see. The President appears to have already turned the Fed’s attention toward guarding against negative impacts from trade fights and it will now be important to watch how large that shift proves to be — policies and trends producers should watch closely over the coming weeks, Washington Insider believes.
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