The Federal Reserve has been pumping liquidity (aka, air) since late 2008. And the stock market and commercial real estate prices have soared.
Market Watch: Federal Reserve officials from Chair Jerome Powell on down have been pretty consistent in their scorn toward negative interest rates, even as the market briefly priced in the expectation that U.S. rates would fall below zero.
That criticism takes two forms — one, Fed officials say evidence doesn’t show much effectiveness where they have been tried, and two, negative interest rates might throw markets, such as those for money markets, into turmoil.
So it’s notable, if not a signal of future intention, that a publication from the St. Louis Fed argues in favor of negative interest rates.
Like Rudebusch’s -13.52% Fed Funds target rate?
But don’t get your hopes up for negative mortgage rates. At best, 30-year mortgage rates will shadow the already low 10-year Treasury yield. It really depends on how the 10-year Treasury yield responds.
Lowering the Fed Funds Target rate to negative territory may simply steepen the US Treasury yield curve. Or flatten it like in Japan. Note that the Japanese 10-year sovereign yield is .01% and Japan mortgage rates are around 0.440%.
Ignoring the damage done to savers (how low will CDs and deposit rates drop?), the US will likely not see actual negative mortgages.
Fed Chair Jerome Powell will resist negative target rates.
Speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.
That represents a spread of 13.77% over the current Fed Funds Target rate of 0.25%, the largest disconnect since 2000.
Apparently, Powell has gone as low as he will go.
Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work. Some are even hauling in two to three times as much.