What good are negative rates if the Fed’s unwilling to use them?

Miles Kimball has a new column suggesting that negative interest rates are the magic bullet that would have produced a robust recovery in late 2009:

The paper Robert Hall presented at last month’s Jackson Hole conference (pdf) on monetary policy has a good statement of this widely-held view that the zero lower bound has been a major factor in the miserable course of economic events in the last few years (pdf). The simple truth is that the Great Recession was very painful and US unemployment is still painfully high five years later, primarily because of the zero lower bound. Even without the ZLB, there would have been some hit from the financial crisis that ensued with the bankruptcy of Lehman Brothers on Sept. 15, 2015, but negative interest rates in the neighborhood of 4% below zero would have brought robust recovery by the end of 2009.

He might be right, indeed my very first blog post (after the intro) suggested negative interest rates on reserves.  But there are also lots of other magic bullets that would have greatly moderated the Great Recession.  Nominal GDP level targeting.  Price level targeting from September 2008.  QE pursued a outrance.

The problem is that the Fed wasn’t willing to do any of them.

Consider the widely rumored “taper” that may be announced next week.  Is this something the Fed would do if policy were actually constrained by the zero bound?  Of course not!  Indeed the reason often cited for tapering in the face of subpar employment and inflation data is that the Fed actually has a third objective. It’s worried that QE produces super low interest rates and helps inflate asset bubbles.  I think that is absolutely crazy, but it’s apparently the view within the Fed.  So if the current near-zero rates are seen as causing asset bubbles, how do you think the FOMC would feel about a proposal for negative 4% interest rates?

We as a profession need to stop looking for magic bullets and start asking why most economists favor tighter money even as we are falling below our inflation and employment objectives.  The Fed follows the consensus.  Until we change the consensus there is no hope for a better policy.

One reason I lean toward NGDPLT is that unlike negative rates it doesn’t require low interest rates to work. Instead of lowering markets rates, you try to raise the Wicksellian equilibrium rate.  That’s easier to sell to a profession that has become very squeamish about low rates.

And BTW, we as a profession need to stop saying that QE has absolutely no affect on asset prices even as asset markets are FREAKING OUT over the prospect of an end to QE.  I mean, is one of the qualifications for becoming an economist that you have to promise to never pay any attention to what market signals are telling us about the impact of policy?  (And I’m calling out both sides of the ideological spectrum here.)

HT: Tyler Cowen



33 Responses to “What good are negative rates if the Fed’s unwilling to use them?”

  1. Gravatar of benjamin cole benjamin cole
    8. September 2013 at 17:33

    Excellent blogging, amen!

    The PCE deflator near 1 percent and trending down but the economics profession says we have easy money.

    Now the Fed is cowering in the face of “unquantifiable financial risks,” that is to say, ghosts.

  2. Gravatar of Edward Edward
    8. September 2013 at 17:43

    I hate the Fed members, the tight money crowd I mean I really HATE them!

  3. Gravatar of Odie Odie
    8. September 2013 at 18:29

    Here are two pubs of the Fed about negative interest rates. They certainly thought about it but saw more negatives than positives:

  4. Gravatar of jknarr jknarr
    8. September 2013 at 18:32

    Negative interest rates are an abomination, and won’t work. The Fed ought to try to push rates all the way to absolute zero first, and watch the monetary base go infinite.

    Ok, so lets say negative rates on consumer deposits – go to physical currency. Outlaw or tax physical currency – go to gold, silver. Outlaw gold, silver – use platinum. All it will do is create black markets in every possible MOE. We’ll ultimately be using cigarettes and sardines as a MOE MOA. Prison, in short.

    Perhaps that’s a good thing, depending on your perspective. Get the right to nationalize savings, monitor, evaluate, and tax every transaction in a cashless society, make criminals of all the rest. As they say, you can’t govern innocent men.

    Maybe Miles ought to be first to volunteer for negative rates. We can drain his bank account at 1% per annum for the common good, make him only use credit cards with an additional 5% tax, and then publish all his transactions in the WSJ. It’s magic!

    BTW, how would negative rates square with the fifth amendment, anyway? The “takings clause” specifically.

    “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

    Negative interest rates sounds like private property taken for public use to me.

  5. Gravatar of Ben J Ben J
    8. September 2013 at 18:34


    How is negative nominal rates different to inflation? Why is there a moral distinction?

  6. Gravatar of Chun Chun
    8. September 2013 at 18:34

    Up in Canada, I have heard for three years that housing markets would be busted soon because of low interest rate (1%). This story has come from both the right and left. A difference from that of America is that this fear seems to originate from the media rather than from the profession. But the profession seems pretty quiet about it.

  7. Gravatar of Chun Chun
    8. September 2013 at 18:45

    Or maybe there’s no star economist in Canada.

  8. Gravatar of Max Max
    8. September 2013 at 18:46

    “One reason I lean toward NGDPLT is that unlike negative rates it doesn’t require low interest rates to work. Instead of lowering markets rates, you try to raise the Wicksellian equilibrium rate.”

    Negative rates don’t require low rates to work either. The credible threat of negative rates raises the equilibrium rate relative to a policy with a rate floor.

  9. Gravatar of Bill Woolsey Bill Woolsey
    8. September 2013 at 18:59



    Going to gold or silver is NO problem.

    The price rises. Those holding gold or silver earn capital gains. A thin sliver, but those so wealth save less and consumer more. Or perhaps they diversify and purchase real assets.

    Once the nominal price of gold and silver are high enough that their prices are expected to fall, then holding those metals is less attractive that buying capital goods.

    Spending on output will rise to target.

  10. Gravatar of jknarr jknarr
    8. September 2013 at 19:43

    Ben: if there is no difference between real- and nominal- negative rates, then they don’t need to install a negative nominal rate regime. They can play with negative real rate space, so they ought to stop pitching the idea. Try QE of $800b per month for the next five years, and see how negative real rates go.

    Bill, gold would be used as a MOE when currency is eliminated. Negative rates on deposits would push savers out of the banking system and into currency in the mattress, i.e. wouldn’t work. So they’d have to retire currency also. Guess what? When you change incentives, behavior changes too. People will not just sit around and allow their savings to be plundered.

  11. Gravatar of lxdr1f7 lxdr1f7
    8. September 2013 at 20:08

    Even though interest rates on reserves are near zero monetary policy is tight because money isn’t expanding at optimal rate. Most of the broad money supply is created through bank lending. Therefore banks perform monetary policy. Necesitating people to enter greater levels of debt to expand the money supply is undermining demand for money because people want to deleverage. High debt levels of public are reducing their ability to be credit worthy and therefore the banks are imposing a contractionary monetary policy.

    As a result of insuficient lending confidence in the general economy is being undermined.

    If the fed interacts directly with the public in a non debt manner then monetary policy can be expansive while people can deleverage to a reasonable level.

    Zero return on reserves is a consequence of high demand for reserves by the banks. But the general public demand for reserves is not the same. The general public would benefit more from consumption, deleveraging and other assets than holding reserves. Therefore the problem is the central bank is only interacting the wrong segment of the economy.

  12. Gravatar of Maurizio Maurizio
    8. September 2013 at 20:44

    Could you kindly explain why the belief that ultra-low interest rates create bubbles (negative supply shocks) is crazy? I am genuinely interested.

  13. Gravatar of jknarr jknarr
    8. September 2013 at 21:32

    “Prisoners need a proxy for the dollar because they’re not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries.”

    Coming to a bank near you….


  14. Gravatar of Benjamin Cole Benjamin Cole
    8. September 2013 at 22:03

    OT but in the ball park:

    Krugman recently blogged that if Summers gets the nod at the Fed, he should consider something big and dramatic at the Fed to shake things up.

    Since pulling in the horns a bit is not big and dramatic, I gather Krugman is suggesting to Summers to blow things wide open with an aggressive pro-growth monetary policy.

    Worth noting,and I hope the suggestions sticks.

  15. Gravatar of Saturos Saturos
    8. September 2013 at 23:39

    A circumspect essay on the Fed Chair by John Cochrane (do you agree about the Philips curve?) http://johnhcochrane.blogspot.com.au/2013/09/fed-chair.html#more

  16. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2013 at 04:57


    I didn’t think much of the Cochrane piece.

    He says everything is so complicated…really?

    When you are running at 1 percent on the PCE deflator and the economy in in perma-doldrums and interest rates are near ZLB? Don’t you think printing more money is the obvious course of action?

    Cochrane seems like a nice guy, but there is just a virus, or tenacious peevishness, on the right-wing that the Fed should never stimulate. That QE is fishy and suspect. Cochrane seems to subscribe to that notion, and never offers the observation that perhaps the Fed now is tight and need to loosen up.

    As to rulese-based monetary policy, good enough if it is not restrictive, and restrictive is the central banker’s first predilection.

    I think Krugman has it right. Summers should get in there and blow the doors wide open. We have a a timid, indecisive, irresolute Fed since 2008, and we have paid the price.

    I hope Summers gets in there and vows to print money until the sewers are stopped up with Benjamin Franklins.

  17. Gravatar of ssumner ssumner
    9. September 2013 at 04:58

    jknarr, Does your argument apply to real rates or nominal rates?

    Max, That may be right, but the issue here is appearances. The profession might be more frightened by the prospect of negative rates.

    jknarr, You said;

    Bill, gold would be used as a MOE when currency is eliminated. Negative rates on deposits would push savers out of the banking system and into currency in the mattress, i.e. wouldn’t work. So they’d have to retire currency also. Guess what? When you change incentives, behavior changes too. People will not just sit around and allow their savings to be plundered.”

    You are missing the whole point! The whole idea is to reduce the demand for cash. But instead of retiring it you allow inflation.

    Maurizio, As you recall when rates plummeted in 2007-09 toward zero, asset prices crashed. So there is no correlation. And economic theory says that low rates should not cause asset prices to exceed fundamental values. When theory and real world evidence both say you are wrong, it’s crazy to continue believing something.

    The theory is based on the misconception that low rates reflect easy money, but they don’t.

  18. Gravatar of ssumner ssumner
    9. September 2013 at 05:06

    Saturos, I’d say the PC has been screaming demand not supply, as have the asset markets. In 2009 we had deflation, the biggest drop in NGDP since 1938 and soaring unemployment. How is that not demand? Since then we’ve had the slowest recovery in demand in any expansion in US history (at least as far back as I know), and a slow recovery in RGDP. What’s the mystery here that needs to be explained?

  19. Gravatar of TravisV TravisV
    9. September 2013 at 05:25

    True or False?

    Krugman: “The Wonk Gap”


    “Mr. Barrasso was inadvertently illustrating the widening “wonk gap” “” the G.O.P.’s near-complete lack of expertise on anything substantive. Health care is the most prominent example, but the dumbing down extends across the spectrum, from budget issues to national security to poll analysis. Remember, Mitt Romney and much of his party went into Election Day expecting victory.”

  20. Gravatar of Brian Donohue Brian Donohue
    9. September 2013 at 06:05

    Look, I think NGDPLT is worth a shot, but let’s not kid ourselves about what’s been going on. Savers (evil hoarders) have been skewered in the best Keynesian tradition for over a decade now.

    The real annual return on 1-year treasury bonds over the past five years is -1.4%, using the PCE deflator. We can go back to 2002 and observe twelve year real returns on 1-year Treasury bonds of -0.2%.

    These numbers have no parallel, even in the inflation-ravaged 1970s.

    Last December, the yield on 20-year TIPS hit -0.17%.

    I try to teach my kids about savings and interest, but in doing so, I can only point to theoretical or historical examples.

  21. Gravatar of DanC DanC
    9. September 2013 at 06:07

    Not on topic but Taylor comments on Scott’s views at his blog http://economicsone.com

  22. Gravatar of jknarr jknarr
    9. September 2013 at 06:13

    I think that everybody is discussing negative nominal interest rates that are set by the US Federal Reserve.

    Depending on whether the Federal Reserve System (and US dollars) is a public- or private- entity, negative nominal interest rates appear to violate the takings clause of the US constitution.

    And the currency demand question has been addressed by the Fed itself. There is more demand for currency, not less.

    Miles’s theory is that the new MoA is somehow set by electronic negative-yield money, and currency prices just stand by gawping. Exactly how does the king declare this into being? Clearly, he does not fill up his own gas tank. There is already two-tier electronic-or-currency pricing, and electronic currency has a larger risk premium, i.e. inferior.

    ps, krugman’s “wonk gap” is like saying Adam Smith has a “hand gap”. I continue to be amazed that people take him this seriously.

  23. Gravatar of TravisV TravisV
    9. September 2013 at 06:21

    Josh Barro:

    “The Larry Summers Nomination Could Be In Trouble Thanks To Syria”

    “My guess: If the Syria resolution gets approved, Obama will go for Summers. If it’s defeated, Obama will punt where he can by picking an uncontroversial Fed nominee. The key question is whether that means Yellen or someone else who might not be as committed to accommodative monetary policy.”

    Read more: http://www.businessinsider.com/how-syria-makes-it-less-likely-that-larry-summers-will-be-fed-chair-2013-9#ixzz2ePDbxVxN

    I hope and pray that Josh is right!!

  24. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2013 at 07:03

    And here again, I will tell you WHY you don’t win the consensus.

    Because you don’t put the meat in the window.

    NGDPLT has a clear case to make loudly and publicly that it:

    1. shrinks govt.

    2. weakens the power of bankers.

    3. keeps govt. from growing the safety net – a la Obamacare

    And to do this, MM simply has to spend some time talking about the Yang and not the Ying of it’s system.

    95% of the discussion between the NK and MM in econoblogophere is about MOAR PRINTING NOW!

    Thats MM being wimpy and not wanting to ruffle feathers.

    Forget the NOW story, instead:

    1. tell conservatives / Tea Party types, that under NGDPLT we’d have less inflation since (pick a historical point).

    2. promise them we can start now with no makeup and this will lead to higher rates of interest SOONER than t=if we keep bumbling along.

    3. Show them historically how the housing crisis WOULD NOT HAVE STARTED. We know for sure the Housing delinquencies caused the Financial Crisis.

    So on # MM two promises: under MM there wouldn’t have been as many bad loans written in 2004-2005. And once the Finc Crisis hit, it’d be smaller AND no worries we’d keep NGDPLT going so the banks could fail and die.

    Look, MM is capable of winning over conservatives like Uncle Milty did, but he TRIED TO DO IT.

    Uncle Milty romanced the right, he fed them red meat, MM shouldn’t sit around wondering why the consensus econos think X, Y, Z.

    Turn MM into the small govt. screed that it IS, and watch the consensus econos begin to see it as the safest way to run the economy.

  25. Gravatar of TravisV TravisV
    9. September 2013 at 07:20


    “Fed’s Williams Says to Spot Bubbles Throw Out Idea Investors Are Rational”


  26. Gravatar of Steve Steve
    9. September 2013 at 07:22


    John Williams joins bubble popper crowd

    NEW YORK–If policymakers want to take the first step toward spotting asset bubbles as they form, they need to stop thinking that investors behave in a consistently rational way, a Federal Reserve official said Monday.

    In a speech that did not comment on monetary policy or the economic outlook, Federal Reserve Bank of San Francisco President John Williams used the opportunity before a gathering of the National Association for Business Economics to take stock of what is known of asset bubbles, and what can be done about them.

    The official said it was a complicated problem to solve and that it was an area that the economics community had not done particularly well on in the past, having long held to theories that investors are level headed and well informed.

    The way most economists have viewed the asset pricing, be it for stocks or for housing, has led to some pretty bad outcomes. Most notably, most economists and economic policymakers failed to identify the housing price bubble that once burst, led to the worst economic downturn since the Great Depression.

    Since then, economists have been taking a hard look in the mirror and trying to figure out how they can spot a bubble as it is forming. Once a bubble has been identified, economists and officials are trying to figure out the best way to deal with it, be it some sort of regulatory action, or a more broad based monetary policy response.

    The first step in this process of discovery, Mr. Williams said, is to “acknowledge that investors and financial markets do not behave the way rational asset price theory implies.

    Investors don’t take in all the information that is available to them, and they tend to see the future exclusively through the past, the official said. For example, “when house prices go up, people expect them to continue to rise,” Mr. Williams said. Conversely, “when they fall, people turn much more pessimistic about future house price appreciation.”

    That dynamic creates environments that tend to exacerbate asset movements, whether they be higher or lower. And when policy makers understand this, it can help them find a way to blunt bubbles and prevent the economic destruction that can follow.

    Asset price bubbles and crashes are here to stay,” Mr. Williams said. “They appear to be a consequence of human nature,” he added. The dynamics of how investors act as they put their money to work creates deep challenges for the policymakers that want to promote growth and financial stability.

    This emerging understanding “opens up a world where actions, including regulatory and monetary policy measures, may have unintended consequences–such as excessive optimism, risk taking, and the formation of bubbles–that are assumed away in standard rational models,” Mr. Williams said.

    Future models that deal with identifying asset bubbles “are likely to be far more complicated than the simple and elegant rational models we have relied on in the past,” the central banker said.

  27. Gravatar of Steve Steve
    9. September 2013 at 07:37

    I think John Williams should stick to the symphony.

  28. Gravatar of Brian Donohue Brian Donohue
    9. September 2013 at 07:43

    Not a fan of bubble-ology, but the part about human nature makes sense.

    “What others think something is worth” is, in many circumstances, an extremely useful and efficient way for humans to assign value. Not all the time though.

    Were there monetary aspects to tulip-mania?

  29. Gravatar of jknarr jknarr
    9. September 2013 at 08:48

    The Fed is throwing out all sorts of ad hoc, and frankly stupid, justifications for tight monetary policy. Williams is just be latest.

    It becomes simpler if you assume that tight money (and slow NGDP) causes asset bubbles, as low rates make cash-flow-generating assets more valuable. Tight money causing bubbles is like clouds causing rain – cant have one without the other.

    The real question is: why is the Fed so desperate to keep tight money against all domestic economic reason? I’d suggest that you need to look at the role and value of the USD. Tight money buoys the USD, and the US is a tight money nation – look at rates.

    The whole negative nominal rate push is an effort to keep money relatively tight (don’t print more than other central banks), while also opening the door to lower real rates beyond the ZLB. Depositors get screwed, but if you haven’t noticed, depositors are getting it both coming and going – and are now subordinated first-loss bank capital now, too.

    The US is running a fiat-debt parallel to 1920s Britain – suffering high unemployment to keep a currency strong beyond its ability. And the profession has about as much of a clue. Where are our economic consequences now?

  30. Gravatar of Geoff Geoff
    9. September 2013 at 15:56

    Miles Kimball is uninformed on the nature and purpose of interest rates. He fallaciously believes it is nothing but a regulatory tool. In reality, market interest rates perform an indispensible function in regulating the capital structure of the economy. Non-market interest rates destroy this function, and put the economy at greater risk.

    I really wished that someday macro-economists started thinking about how the markets work without any central control. It’s the only way to understand the destructiveness of centralized tampering over interest rates.

  31. Gravatar of Geoff Geoff
    9. September 2013 at 15:58

    “We as a profession need to stop looking for magic bullets”

    Then stop treating NGDPLT as a magic bullet.

  32. Gravatar of Frederic Mari Frederic Mari
    10. September 2013 at 06:05

    1- How is QE causing asset bubbles “absolutely crazy” when tapering does have the markets “freaking out”?

    My own POV: I trust the Fed (the Fed!) economists who came out and admitted that QE had ‘modest’ effects on the real-world. Given that that’s likely the case, fuck the markets. Kill QE, let the markets find their own levels without extra liquidity and avoid potential bubbles building up.

    2- Miles Kimball’s neg. rates: It’s a baaad idea but mostly for the same reasons NGDPT/moderate inflation wouldn’t solve our problems. What we’re lacking is income, money, wages, cash and, basically, spending power. The rest is mere distraction.


  33. Gravatar of ssumner ssumner
    10. September 2013 at 08:36

    Brian, You said;

    “Savers (evil hoarders) have been skewered in the best Keynesian tradition for over a decade now.”

    NGDPLT would help both lenders and borrowers, it’s not a zero sum game.

    jknarr, No one is forcing people to lend money at negative real rates. And no concept that involves a price index violates ANYTHING in the Constitution. They didn’t exist back then.

    Morgan, Ditto my previous reply to you in response to your meat in the window comment.

    Travis, That William’s quote is just sad. They’ve learned all the wrong lessons.

    Frederic, I meant freaking out in a rational way. It’s bad policy, markets should go down.

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