Government Lending

Federal Reserve united against Trump’s demand for negative interest rates

The use of negative rates carries too much instability risk, Fed policymakers said

President Donald Trump has extolled negative interest rates on Twitter and in speeches, making clear he wants the Federal Reserve to slash its benchmark rate below zero, a policy it has never used before.

Fed policymakers are unanimous in their distaste for the idea, judging from the minutes released on Wednesday for the Fed’s October meeting. The use of negative rates carries “risks of introducing significant complexity or distortions to the financial system,” according to the minutes.

It’s the first known time the policymakers on the Federal Open Market Committee, or FOMC, have had an on-the-record discussion about the possibility of using the monetary policy the European Central Bank introduced in 2014.

At the Oct. 29 to 30 meeting, the Fed cut its rate by a quarter of a percentage point to a range of 1.5% to 1.75% and signaled it likely was done with easing, for now.

“All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States,” the minutes said. “It was unclear what effects negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses.”

The adoption of negative interest rates by the European Central Bank has failed to stave off a slowdown. Economic growth in the Euro Area probably will fall to 1.1% this year and 1% in 2020, according to the average estimate of economists in a Bloomberg poll. Last year, the growth rate was 1.9% and in 2017 it was 2.7%.

“Remember we are actively competing with nations who openly cut interest rates so that now many are actually getting paid when they pay off their loan – known as negative interest,” Trump said in a speech to the Economic Club of New York on Nov. 12. “Whoever heard of such a thing? Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.”

Under a negative rate policy, banks and other financial institutions have to pay interest for parking excess reserves with the central bank. It’s a way to encourage banks to lend to businesses and consumers, who don’t get paid to borrow, contrary to the president’s description.

“Differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States,” the Fed minutes said. “Negative rates could have more significant adverse effects on market functioning and financial stability here than abroad.”

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