Will the Federal Reserve lower interest rates to the negative territory?

A decade ago, negative interest rates were only a theoretical curiosity. Two years ago, it began showing up as an unconventional step that a few small countries considered. Now, it is the stated policy of some of the most powerful global central banks, including the European Central Bank and the Bank of Japan.

The Federal Reserve chairwoman, Janet Yellen, acknowledged in a congressional testimony this week that the Fed was taking a look at the strategy, though she emphasized no such move was envisioned.

Will the Fed use negative interest rates?

We don’t think so.

For one thing, the United States economy, and particularly its labor market, looks to be in stronger shape than that of many others around the world. So the Fed expects to be in interest-rate raising mode this year (though exactly how fast is very much in question). But even if the economy does take a turn for the worse, there’s no certainty that negative rates are the path the Fed would take.

There is a question of whether that would even be legal. It’s not clear if the language of the Federal Reserve Act allows negative bank rates.

Even if it is legal, it is not clear whether the payment system in the United States could handle it. The institutional structure of our money markets are not built to handle negative interest rates.

Going to negative rates for the first time would have greater startup costs in the U.S. than in the five currency regions that have already established it. We believe the wide range of mechanical and practical issues involved mean that the benefit of negative rates in the U.S. wouldn’t be worth it.