Because Congress told them to

Recently, I’ve seen some discussion to the effect that negative interest rates are in some sense “natural”, not weird. The basic idea is that it was difficult to store wealth throughout most of human history. Thus the return on wealth was generally negative. (JP Koning and Joe Weisenthal provide nice examples.)

I think that’s a perfectly fine argument, as long as people understand that the interest rate being referred to here is the real interest rate.  I’m a bit worried, however, that people might confuse that argument with a completely different question—is there something weird or undesirable about the negative nominal interest rates that we see in Europe and Japan?

Back in April 1977, 3-month T-bills yielded about 4.5%, while the inflation rate over the previous 12-months had been running at close to 7%. Indeed when I was young, negative real interest rates were quite common. If you add in the fact that nominal interest is taxable, then the real after-tax rate of return during the 1970s was usually negative, at least for those who held taxable bonds.

So there’s nothing at all unusual about negative real rates. We also saw them in 2003-05. They are quite common. What is unusual is negative nominal interest rates. So are negative nominal rates natural?

It turns out that nominal variables do not have “natural rates”. We get to choose the level of nominal variables when we choose our monetary policy. We can have negative nominal interest rates or positive nominal interest rates; it’s entirely up to us. If Congress doesn’t want negative nominal interest rates, it’s perfectly OK for them to pass a law instructing the Fed not to allow negative interest rates . . . UNDER ONE CONDITION.

Long time readers know where I’m going with this. If Congress wants to instruct the Fed to disallow negative nominal interest rates, they need to know that in doing so they are also instructing the Fed to set an inflation (or NGDP growth) target high enough so that the Wicksellian equilibrium nominal rate never goes negative. Otherwise the Fed can’t achieve its dual mandate.  And that’s fine, if Congress wants to go down that road.

In other words, because of the dual mandate, Congress needs to know that legislation banning a Fed policy of negative interest on reserves will be interpreted (I hope and presume) as an instruction for the Fed to use expansionary monetary policies to maintain positive interest rates. The Fed will presumably raise their inflation target, and also do enough QE to hit the higher target. Whatever it takes. After all, Congress would have told them to do that.

You might say that Congress doesn’t understand this.  But in any debate over this sort of radical legislation, Fed officials would almost certainly make it very clear to Congress that (in their mind) the implication of this legislation is a slightly higher inflation target, unless Congress provides some other method for achieving the goal, such as authorization for the Fed to buy unlimited amounts of any asset, anywhere in the world, if that were necessary to hit the 2% inflation target.

If you don’t believe me, consider the following.  In 1977, Congress gave the Fed a mandate for price stability, high employment and “moderate long-term interest rates”.  So Congress has already passed the sort of law I am discussing, but intended as more of a cap on rates than a floor.  You might wonder how the Fed interprets their moderate long-term interest rate mandate.  Fed officials say that they believe the only way to fulfill the instruction to maintain moderate long-term interest rates is by keeping inflation low.  Just as I claim they’d interpret a no negative interest rate law, except in the opposite direction.  Most of the time, the Fed does not even directly target long-term rates.  Rather, they target inflation, and assume that doing so will keep long-term rates “moderate”, as Congress instructed them to do.

With a law banning negative nominal interest rates, Congress would be instructing the Fed to keep interest rates within a sort of corridor.  But this would be nothing like the corridor associated with short-term interest rate targeting.  This would be a long-term interest rate corridor. Control would be done via the Fisher effect, not the liquidity effect. (Steve Williamson as Fed chair?)

And the only way to keep rates within that corridor would be to select an inflation target high enough to keep nominal interest rates above zero, but low enough so that nominal long-term rates never rose above “moderate”.  To do that, the Fed would probably have to switch to level targeting (of prices and NGDP) and perhaps slightly raise the inflation target.

PS.  As always, I buried the lede.  It seems to me that this post is a powerful argument for the Fed asking Congress whether negative rates are OK.  Whichever way Congress answers, the Fed immediately has much more power, more “ammo”.  They either get to use negative IOR, or get to do unlimited QE, or they get to set a policy target path high enough to avoid the zero bound and still hit the dual mandate.

Because Congress told them to.



31 Responses to “Because Congress told them to”

  1. Gravatar of George George
    8. August 2019 at 19:20

    “Let’s hope the Dems win in 2020”

    Joe Biden: “Poor kids are just as bright and just as talented as white kids.”

    This blog endorses racist Demokkkrats for 2020!

  2. Gravatar of George George
    9. August 2019 at 04:09

    Because fake news told the sheep to

  3. Gravatar of Benjamin Cole Benjamin Cole
    9. August 2019 at 04:09

    Interesting ideas.

    If QE does the trick, maybe this is the right approach.

    I recently said the Fed needs a 2% inflation target—as an inviolable, sacralized floor, not as a target-ceiling.


  4. Gravatar of George George
    9. August 2019 at 04:10…uhhhhh

  5. Gravatar of Benoit Essiambre Benoit Essiambre
    9. August 2019 at 04:41

    I have been saying this for years. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

    The corollary of all this is that central bank created fiat assets can, even at 0% interest, have returns above what private markets marginal asset can return (on a risk adjusted, liquidity adjusted basis).

    When they do this (like the ECB is currently doing) it puts a gridlock in the private asset market, creates an indirect massive economy wide subsidy on job destruction and on pulling resources out of the real economy and generates an untold amount of suffering. Who would invest in new private assets when you can get government paper with above market returns. The only winners in the ECB situation is foes such as Russia and China who are emboldened by the West’s economic weakening. In the regions that trade in euros, everybody loses. The rich lose, the poor lose even more. It’s all so sad…

  6. Gravatar of rayward rayward
    9. August 2019 at 05:11

    Sumner wants Williamson as Fed chair and Sumner thinks I am clueless. Sumner thinks he is smarter than Robert Shiller, who Sumner believes makes the mistake of “reasoning from a price change” (today’s equivalent of the parrot who is taught to say “supply and demand” and gets tenure). Wishing upon a star; pushing upon a string.

  7. Gravatar of Michael Rulle Michael Rulle
    9. August 2019 at 05:39

    The 30’s were the worst for those who needed to work, of course, but from an investment perspective, the 1970-1980 period was worse. Real Returns in stocks were zero, but nominal returns were about 130% TR from 1970-80. In bonds, similar nominal returns—-100%—-but negative real. Plus taxes. In the 30’s, nominal negative, but real flat to positive—-bonds had a great decade in real term about 70%TR.

    Maybe the 70’s is still deep in their psyche.

    Recognizing it may be unclear if the Fed can lower interest rates below zero (although their dual mandate should “trump” other language that did not contemplate negative rates when written), the Fed currently has power and ammo it is already not using. I would like to see them exercise that now rather than jump into the political maelstrom. NGDP is below your target, and and like their 2% inflation “target” it seems to be treated like a cap. They can always first drop IOR close to zero if not actually zero. They certainly can do open market repos—-and I was not aware they were restricted from outright buying.

    Most importantly they need to believe market prices are meaningful, more meaningful than a group of people making guesses. Bottom line, the Fed is not hitting inflation targets, not hitting NGDP targets (he must have that in his mind) and acts like the market is just “another seat at the table”.

  8. Gravatar of ssumner ssumner
    9. August 2019 at 07:39

    Rayward, No, I don’t favor Williamson as Fed chair. Do you know the meaning of a “question mark”?

    Michael, Yes, the entire 1966-82 period was really bad for investments.

  9. Gravatar of George George
    9. August 2019 at 07:47

    Even more evidence just released showing that the Obama admin/FBI/DOJ attempted a coup to oust a duly elected POTUS.

  10. Gravatar of George George
    9. August 2019 at 07:53

    Bruce Ohr 302’s have been released. And they show that Ohr and a many others committed perjury to the FISA Court to get the Carter Page warrant and spy on the Trump campaign (FISA allows for a ‘3 hop’ spying, meaning if they are allowed to spy on Page, they can also spy on everyone he ever communicated with, and everyone those people communicated with. One person can be used to spy on everyone in the campaign.

    Remember who was sitting down with Ohr to write up these 302 forms? I do!

  11. Gravatar of George George
    9. August 2019 at 07:54

  12. Gravatar of George George
    9. August 2019 at 07:58

    On Aug 15 when the Director of National Intelligence Dan Coats (deep state puppet) steps down, that is when the floodgates will start to open.

    The deep state is panicking beyond belief.

    Fake news has gone completely insane.

    The Demokkkrat’s attempt to divide the country by race HAS FAILED.


  13. Gravatar of George George
    9. August 2019 at 08:27

    “Let’s hope the Dems sin in 2020”

    So the sheep can get more lies from Demokkkrats and from Fake News!

  14. Gravatar of George George
    9. August 2019 at 09:37

    How China’s spying (with help from Satan worshiping Secretaries of State) KILLS Americans.

  15. Gravatar of Carl Carl
    9. August 2019 at 11:20

    Good article. I guess there is just a WTF quality about negative nominal interest rates that makes a lot of people feel deeply unsettled who are not unsettled by negative real interest rates. There would be psychological value to instructing the Fed to implement policies to try to avoid them.

    And I want to give a shout out to @George for his contributions to the discussion.

  16. Gravatar of George George
    9. August 2019 at 12:11

    Add liberal monetarist bloggers who project their own hatred to these sickos!

  17. Gravatar of Christian List Christian List
    9. August 2019 at 12:31


    The substance of your entry can be summarized in one sentence: The Fed already has all the means and mandates it needs, it’s just too incompetent to use them.

    One cannot expect Congress to correct the Fed’s monetary policy mistakes. That’s the Fed’s central responsibility, and theirs alone.

    It’s bad enough that Trump has to tell the Fed what’s right at the moment.

  18. Gravatar of ssumner ssumner
    9. August 2019 at 16:18

    Christian, You said:

    “The substance of your entry can be summarized in one sentence: The Fed already has all the means and mandates it needs, it’s just too incompetent to use them.”

    No, that’s not what the post is about. It’s about negative interest rates. Still having trouble with reading comprehension?

  19. Gravatar of Benjamin Cole Benjamin Cole
    9. August 2019 at 17:08

    OT tin-foil hat questions: okay, let us say that QE is the favored tool of monetary policy when interest rates hits zero or less and that we do not want to go to helicopter drops.

    The recent experience in Japan seems to suggest that we need to think about QE in jumbo size. The Bank of Japan has purchased back Japanese government bonds equal to excess of 100% of Japanese GDP and seem to be gaining a small amount of traction.

    The Federal Reserve Bank of St Louis has issued studies that suggest that US QE should have been as much as four times larger to get a lot of traction.

    Should the Federal Reserve, as part of its forward guidance obligations, prepare the public that QE will come in large and fast scale if done in the future? Should that be part of the Fed’s public education program now? “When we start QE we are going to start at $400 billion monthly.”

    After all, what is the point in tweety-bird QE when people are unemployed? And if central banks want markets to believe they are not ineffectual weaklings, should they not have bold programs ready to deploy and which are made public now?

    Last question. Since QE will almost surely be conducted simultaneously with large Federal deficits, can we tell the difference between QE and helicopter drops?

    Note: Brian E’s commentary above is interesting, particularly when thinking about the Fed’s interest on excess reserves policy.

  20. Gravatar of George George
    9. August 2019 at 18:37

    A s#!thole state with massive voter fraud is how criminal Demokkkrats ‘win’ elections.

  21. Gravatar of George George
    10. August 2019 at 06:29

    Operation Mockingbird.

    Lies are the only way to not be racist, pointing out the truth proves you’re a racist.

    “Why is it that [I have been brainwashed to believe by Mockingbird Media] most shooters are white nationalists?”

  22. Gravatar of George George
    10. August 2019 at 06:36

    Aaaaaand the day after Epstein docs were released naming Prince Andrew, Bill Richardson and others as pedophile rapists (not to mention exonerating Trump from fake news accusations), Jeffrey Epstein is dead.

    Epstein’s island is where Bill Clinton flew to at least 26 times (according to released flight logs). 5 times without secret service protection.

    +1 Clinton Body Count?

    How much more obvious can this get?

    Fake News = Enemy of the People

  23. Gravatar of George George
    10. August 2019 at 08:37

    Welcome to the Great Awakening.

    The control of information is something the elite always does, particularly in a despotic form of government. Information, knowledge, is power. If you can control information, you can control people.

    This was always the most profound, and closely kept, ‘secret’ of humanity. The human race has been killing each other for millennia to be the controllers of information/knowledge.


    Trump derangement syndrome is one byproduct of one of if not the largest coordinated disinformation campaign spanning the globe (they did this to Russians, and North Koreans as two of the most obvious historical examples) in all of human history.

    Every time this ‘secret’ became understood by enough people worldwide such that it threatened their control, the elite has used the information control to get the awakening people to attack each other by wave after wave of false information.

    Do most people prefer to believe what they believe ‘most’ other people believe?

    Who has time to verify all of what is true and false out there, having full time jobs, family, pressures of life, etc?

    ‘They’ thought they had sufficient assets to take the risk at world control.



    Big tech.

    They never thought she would lose.

    No amount of attacks against ME will do ANYTHING to my understanding of my own thoughts.

    Logic and evidence about content.

    Blog author IMMEDIATELY attacks posters who do not follow his own narrative.

    “Idiot”, “Dumb”

    Truth LOOKS like Hitler when Hitleresque thought police have conditioned your mind.

    Who controls central banks?

    Who really controls them?

    FACT: US Federal Reserve is a privately-owned company, sitting on its very own patch of land, immune to the US laws.

    What kind of a power would want power over the monopoly of money immune to true transparent economic-oversight?

    What have the sheep been taught to believe by frauds like the blog author?

    That they are not to trust themselves (power to elect ‘politicians’), the central bank is to have ‘independence’…because look at the disasters of other central banks…THAT THEY ALSO CONTROL.

    Who are these ‘anonymous’ posters on this blog?

  24. Gravatar of George George
    10. August 2019 at 08:48

    Somebody’s getting fired from Twitter!

  25. Gravatar of George George
    10. August 2019 at 09:02

    Well that didn’t take long for anons to debunk a fake news story on Epstein?

  26. Gravatar of George George
    10. August 2019 at 11:21

    It is 100% a problem when people willing to do this to women, are the same people who spy on our national defense secrets.

    These people are sick!

  27. Gravatar of George George
    10. August 2019 at 11:36

    And this is how they got “97% of climate scientists” to agree humans are evil polluters and must be controlled by government.

    And how they keep cures to diseases off the market.

    Welcome to the awakening, buckle up, because the satanic house of cards is crumbling worldwide and this is about to go stratospheric.

  28. Gravatar of George George
    10. August 2019 at 11:38

    Epstein is an essential part of their machine. You need a merchant of evil in order to implicate, entrap, blackmail, or allegiance-proof your elites.

    In 2006 Jeffrey Epstein hosted 21 of the top scientists in the world, at that pedophile/ritual sacrifice island. They blackmailed scientists too. No one was safe.

  29. Gravatar of W. Peden W. Peden
    10. August 2019 at 12:22


    Great post, as usual.

    OT: Maybe this is confirmation bias, but I think that the recent combination of low unemployment and low interest rates vindicates the natural rate approach to inflation targeting (i.e. focus on inflation expectations and whether they match the target) rather than the NAIRU approach (i.e. look at whether unemployment is about its expected non-accelerating rate).

    The NAIRU approach seems to view market economies as inherently unstable, unless the central bank can steer them aright…

  30. Gravatar of ssumner ssumner
    10. August 2019 at 20:33

    W. Peden, Good point.

  31. Gravatar of P Burgos P Burgos
    12. August 2019 at 23:24

    “legislation banning a Fed policy of negative interest on reserves will be interpreted (I hope and presume) as an instruction for the Fed to use expansionary monetary policies to maintain positive interest rates. The Fed will presumably raise their inflation target, and also do enough QE to hit the higher target. Whatever it takes. ”

    Would it be reasonable to be skeptical that the Federal Reserve would interpret things this way given their record over the past 20 years or so?

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