‘No Means No’: Critics Plead With Fed To Avoid Negative Rates Amid Pressure From Trump, Markets

“The committee’s view on negative rates really has not changed. This is not something that we’re looking at”, Jerome Powell said Wednesday, after regaling America with a truly dour take on the outlook for the world’s largest economy absent sufficient fiscal support.

“I know there are fans of the policy, but for now, it’s not something we’re considering”, he added. “We think we have a good toolkit, and that’s the one we’ll be using”.

When it comes to “fans” of negative rates, Donald Trump can be counted. The president on Tuesday referred to sub-zero policy rates as a “GIFT” (all-caps in the original tweet) and implored the Fed to avail itself of the opportunity to push rates below zero.

Read more: Trump To Powell On Negative Rates: Don’t Look A ‘GIFT’ Horse In The Mouth!

Powell’s remarks suggest the Fed will resist the pressure – as long as it can, anyway. His colleagues offered similar push back on Monday and Tuesday.

Market bets on NIRP from the Fed were pressed initially as Powell emphasized structural risks to the economy, but were trimmed once he explicitly addressed the point. Last week, STIRs abruptly began to price in an adventure below zero as early as late 2020.

On Tuesday, JPMorgan’s Nikolaos Panigirtzoglou ventured that “mildly negative rates… for a year or two could be beneficial in the current conjuncture”, even as he said the bank’s own take (i.e., that negative rates from the Fed aren’t likely) was unchanged. Panigirtzoglou also emphasized rates shouldn’t be too negative for too long.

Meanwhile, Daniel Tenengauzer, head of markets strategy at BNY Mellon was forthright in a Wednesday note called “Negative rates: No means no”.

He cited some of the factors mentioned here last week in “The Fed Effect On Flows, And A $4.7 Trillion Cash Pile Suddenly Facing Negative Returns“. In that linked post, I stated the obvious, which is that pushing rates negative would imperil nearly $5 trillion in assets parked in money market funds – or at least the portion in government securities.

The juxtaposition between government fund flows and prime flows has been stark, heavily favoring government funds over the course of the crisis.

Prime flows recovered a bit after the Fed stepped in, but it hardly makes a difference.

That builds on a trend which began years ago with regulatory reform, and it factors into the debate on negative rates.

Consider this from the above-mentioned Tenengauzer:

In the past four years government funds received $3 trillion. Between 2016 and 2018 as the Fed tightened monetary policy, these funds were particularly attractive. Since the Fed started easing a year ago, demand for prime funds improved only marginally. Nevertheless, money managers would still rather hold safe assets than face potential redemptions below the buck in prime funds. Assuming interest rates drop below zero would therefore pose a difficult dilemma in government funds. Even if management fees were waived, money managers may pay as much as $10 billion each year if rates in these funds were -25bps, for instance. 

But that’s hardly the only problem. Tenengauzer also warns on pension insolvency, noting that unfunded obligations “now represent over half of liquid AUM in 20% of defined-benefit funds”. He then points to the still gargantuan global pile of negative-yielding debt on the way to noting what countless others have lampooned over the last three years – namely that “the only reason for any performance at all in negative-yielding bonds is even deeper negative yields”.

Despite the myriad pitfalls, it may prove difficult for the Fed to stick to its guns. “I don’t think [Powell] could have been clearer, but market participants have not been willing to take ‘no’ for an answer yet, so I am not optimistic that the message will be absorbed this time either”, Amherst Pierpont Securities chief economist Stephen Stanley said Wednesday.

SocGen’s Albert Edwards scoffed. “Powell says, ‘negative rates is not something we are looking at'”, he wrote, in a tweet, before “translating” the Fed chair’s remarks as follows: “We are grasping at straws and if push comes to shove, anything goes”.