WASHINGTON, D.C.: Janet Yellen said on Thursday (Friday in Manila) that the Federal Reserve had no plans to move toward negative interest rates, following the Swedish central bank’s rate cut deep into negative territory.
But Fed Chair Yellen expressed “surprise” at how far European central banks had gone into negative territory, and given the weakness of inflation and the global economy, said the Fed was studying the issues involved “to be prepared.”
“I was surprised it was possible to move rates as negative as some countries have done,” she said in a Senate hearing.
Earlier Thursday Sweden’s central bank cut its key short-term interest rate to a new low of -0.5 percent.
Other central banks in Europe, including the powerful European Central Bank, have also taken the extraordinary steps of cutting their base rates into negative territory in recent months, to combat deflationary pressures arising from slow growth.
Negative rates, in the context of monetary policy, would force commercial banks to pay interest on cash they deposit with the central bank, rather than be paid interest as normally happens.
It is only used in rare circumstances to pressure banks to lend more in commercial markets, to boost economic activity.
On January 29 the Bank of Japan also cut its short-term rate for commercial bank reserves parked with the central bank to -0.1 percent.
BoJ chief Haruhiko Kuroda said at the time the bank may go even further into negative territory if necessary.
“The Japanese economy is not isolated from the global economy,” he said.
But Yellen said that the Fed is not planning a similar move even though US inflation remains weak and far below its 2.0 percent target.
She noted that the Fed actually raised its federal funds rate almost two months ago, as the US economy grows moderately.
After keeping its benchmark federal funds rate next to zero for seven years, the Fed increased it by a quarter-point in December to 0.25-0.50 percent, expressing confidence in US economic strength and that inflation would turn upwards after the impact of the oil price crash passes through prices.
Indeed, in December the forecasts from Fed policy makers implied a four more quarter-point increases this year.
‘We want to be prepared’
However, admitted Yellen on Thursday, “a lot has happened since then. Global economic and financial developments impinge on the outlook. We are in the process of evaluating how those developments affect our outlook,” she said.
Even so, she maintained that it was “premature” to conclude anything on the impact of extreme moves in global markets on the US economy.
“It depends in part on whether they persist and that’s something we’ll be looking at closely going forward.”
Asked if the Fed could go negative in tandem with other central banks, Yellen said it was not likely, but the concept was under study nonetheless.
“In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation. We haven’t finished that evaluation.”
For the meantime, she added, speaking about Fed rate policy: “I have not thought that a downturn sufficient to cause the next move to be a cut was a likely possibility.”