FED Speech & Stance On Negative Interest Rate

FED Speech & Stance On
Negative Interest Rate 

Fed Chairman Jerome Powell’s speech last Wednesday had
left the market with two main points. Firstly, he hinted that the US government
might need to take further measures to deal with the impact of economic damage
caused by the coronavirus. Secondly, the Fed is also convinced that market are
hoping that the Fed will not move towards the decision to adopt negative
interest rates while stating that it is not an option to be considered at the
moment.

Furthermore, from the Fed’s speech, it is foreseeable
that the central bank is trying to pass on the part of its pressure in
supporting the economy onto the government. From the speech, Powell reiterated
that although providing additional fiscal stimulus may incur high costs,
however, it is worth it if these policies are able to prevent the economy from
plunging into a long-term recession.

While the Fed rejects US President Donald Trump’s
desire for negative interest rates adoption, the bank is also slowly guiding
the market to focus on the Ministry of Finance and their potential role in
supporting the falling economy.             

The question in the market is that why doesn’t the
Ministry of Finance fight back? This is due to the conflict between the
Congress and the government itself. Although Trump has repeatedly called for
negative interest rates, the Senate and House may not agree due to relevant
laws which require the Fed to pay interest to commercial banks based on the
balance of reserves deposited into the central bank.

As it is unclear whether or not the Fed has sufficient
power to adopt and support negative rates, the Congress is also worried about
the risks of negative interest rate scenario. This is because cases such as in
Japan and Eurozone who previously adopted negative rates had faced backfire
with the country’s inflation remaining at low levels for a long period of
time. 

As a summary from the Fed’s speech, although the bank
are not to be considered during this period, they did not fully eliminate the
possibility. To be precise, the Fed is trying to maintain its independence from
the government while deciding on its own the best method and policy from their
point of view to support the economy.

As the country continues to battle with the pandemic
uncertainties, adoption for negative interest rates also remains uncertain.
Further signals can be obtained from the upcoming Fed’s testimony on Tuesday
and another speech on early Friday.