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Fed May Lack Legal Authority for Negative Rates: 2010 Memo

Discussion in 'Central Banking & Fed Reserve' started by Ahillock, Feb 8, 2016.



  1. Ahillock

    Ahillock A nobody Mother Lode

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    When has this ever stopped them before. It is a non-issue.

    Fed May Lack Legal Authority for Negative Rates: 2010 Memo

    Matthew Boesler boes_
    February 8, 2016 — 4:06 PM EST

    The Federal Reserve may not have the legal authority to set negative interest rates in the U.S., according to a 2010 staff memo that was posted late last month on the central bank’s website.

    The document, which is dated Aug. 5, 2010, and was publicly released on Jan. 29, suggests the law that authorized the Fed to pay interest on excess reserves, or IOER, may not grant it the authority to charge interest. That could constrain the central bank’s ability to take interest rates below zero, though it might be able to find a work-around.

    Speculation has increased that the Fed might consider negative rates in the next economic downturn as concerns of a U.S. slowdown have mounted. This also follows recent moves to cut borrowing costs below zero by central banks in Europe and Japan that show it can be done. The opinion of Fed staff back in 2010 was that this would difficult under U.S. law.

    “There are several potentially substantial legal and practical constraints to implementing a negative IOER rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero,” the authors wrote. “Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.”

    The Fed did not immediately respond to a request for comment.

    Market Rates
    Market-set dollar borrowing costs have dipped below zero several times in recent years. Three-month bill rates touched a low of minus 0.05 percent on Oct. 2 after the Fed delayed rate liftoff in September amid financial-market turmoil.

    The Financial Services Regulatory Relief Act of 2006 granted the Fed the ability to pay banks interest on reserve balances deposited at the central bank. The IOER rate has been instrumental in the Fed’s effort to lift rates, which it did in December for the first time since 2006.

    According to the Act, “balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.”

    Releases Transcripts
    The Fed released transcripts of its 2010 Federal Open Market Committee meetings last month, and staff memos for those meetings were subsequently published on the central bank’s website.

    If the Fed was not allowed to charge negative rates on IOER, it might still be able to drive U.S. borrowing costs below zero by turning to the rate on overnight reverse repurchase agreements, or RRPs, with money-market mutual funds, said Joseph Abate, a money-market strategist at Barclays Plc in New York.

    The central bank has been using overnight RRPs since Sept. 2013 to put a floor under interest rates, and currently pays 0.25 percent interest on borrowings through its overnight RRP facility. Offering to borrow cash from those funds while charging interest to accept the money could in theory give banks bargaining power to charge their customers to hold deposits as well.

    "It would be sloppy and unpredictable, but yes, you could do it," Abate said.

    http://www.bloomberg.com/news/artic...al-authority-for-negative-rates-2010-fed-memo
     
  2. <SLV>

    <SLV> Gold Member Gold Chaser

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    ZIRP worked so well that NIRP is sure to be a success. (By success I mean that it transferred even more wealth to the top.)
     
  3. Ensoniq

    Ensoniq Gold Member Gold Chaser Site Supporter

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    Not designed to work well just to extend the party a little longer.

    Force as much savings into consumption as they can

    Resist!
     
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  4. Ahillock

    Ahillock A nobody Mother Lode

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    Yellen says Fed isn’t sure whether it’s legal to adopt negative rates

    By Greg Robb
    Published: Feb 10, 2016 12:44 p.m. ET

    WASHINGTON (MarketWatch) — Federal Reserve Chairwoman Janet Yellen said Wednesday there are legal issues that needed to be cleared up before the U.S. central bank could push rates into negative territory, but said she didn’t think there were any serious roadblocks.

    One reason to push rates into negative territory, in other words forcing banks to pay to park a portion of their reserves at the central bank, would give these firms an incentive to lend the funds, thus spurring economic growth.

    In 2010, with the recovery faltering, the Fed considered the adopting negative rates but decided against it. Former Fed Chairman Ben Bernanke said he was concerned what negative rates would do to money-markets funds.

    However, as the global economy has weakened, many central banks, including the European Central Bank, decided to charge banks for parking reserves. The Bank of Japan late last month surprised investors by adopting negative rates.

    Based on this experience, Bernanke said, in an interview with MarketWatch in December, that the Fed should add negative rates to its toolkit.

    In testimony to the House Financial Committee Yellen said the Fed didn’t fully vet the legal issues when it mulled negative rates.

    “I would say that remains a question that we still would need to investigate more thoroughly,” Yellen said.

    But the Fed chairwoman went on to say she didn’t expect there would be “any restriction” that would prevent the Fed from charging banks an interest rate.

    “I am not aware of anything that would prevent us from doing it. But I am saying we have not fully investigated the legal issues. That still needs to be done,” Yellen said.

    One Fed watcher said Yellen’s testimony shows she is not about to pull the trigger on negative rates.

    http://www.marketwatch.com/story/ye...-its-legal-to-adopt-negative-rates-2016-02-10
     
  5. JayDubya

    JayDubya Gold Member Gold Chaser

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    I find it remarkable that we've been at zero rates for 6 or 7 years and the option to move to negative rates was never discussed at the fed.

    Are we to believe that the legality of going negative has not been investigated and discussed by the fed in the past 6 or 7 years?

    That seems to me to be either grossly incompetent or a complete and utter lie.
     

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