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@ Dex, heezsafe, vkt, Scott: 5 Facts About Bank Of Japan's Negative Interest Rates
Good morning @ted, as I expected you are up before I am yet to go to sleep. The match has gone to a 5th set in Australia. Great game between Murray and Raonic.
I hope you can find a good link that explains what the negative interest is all about because there will be a lot of hysteria about this from both people and the financial writers that have no more insight or knowledge than people on the street.
People are going to confuse the nominal rate (Fed funds rate in the US) for the negative deposit rate at the central banks for reserves held there and extrapolate from the former to the latter and make a lot of silly statements. I bet there will be articles on how banks may start charging customers for their money, etc.
This negative interest rate is, in theory, stimulative because it forces the banks holding deposits at the central banks to not hold more than capital requirements (losing value) and lend instead increasing velocity of money to prevent a recession. BoJ is charging this rate to only the excessive tiers held there by the banks.
If the Fed did this, it wouldn't mean a reversal of the Fed Funds rate back to zero and then to negative. They could hold the nominal rate where it is and make deposit rate on excess capital negative. The effective rate paid by banks to each other wouldn't go negative either. Like a QE, this charge on deposits is designed to head off recessionary forces but by forcing banks to lend the money they have than to increase liquidity by placing money in their hands. This is why markets will be rallying today.
Will it help Japan or US? We will just have to see. There are no guarantees. It will have very little impact on the very low interests that we all see in short-term loans with the longer term heading down if banks start to lend more which is stimulative for housing, autos, etc. Financials might head down as the spread narrows and they can't just park the money with the Fed. But I think this has already been priced in over the last few weeks.
All the doomsayers coming out of the woodwork will be having a very good day today without really understanding what this is about. I will just enjoy the increase in portfolio value.
Comments
I hope you can find a good link that explains what the negative interest is all about because there will be a lot of hysteria about this from both people and the financial writers that have no more insight or knowledge than people on the street.
People are going to confuse the nominal rate (Fed funds rate in the US) for the negative deposit rate at the central banks for reserves held there and extrapolate from the former to the latter and make a lot of silly statements. I bet there will be articles on how banks may start charging customers for their money, etc.
This negative interest rate is, in theory, stimulative because it forces the banks holding deposits at the central banks to not hold more than capital requirements (losing value) and lend instead increasing velocity of money to prevent a recession. BoJ is charging this rate to only the excessive tiers held there by the banks.
If the Fed did this, it wouldn't mean a reversal of the Fed Funds rate back to zero and then to negative. They could hold the nominal rate where it is and make deposit rate on excess capital negative. The effective rate paid by banks to each other wouldn't go negative either. Like a QE, this charge on deposits is designed to head off recessionary forces but by forcing banks to lend the money they have than to increase liquidity by placing money in their hands. This is why markets will be rallying today.
Will it help Japan or US? We will just have to see. There are no guarantees. It will have very little impact on the very low interests that we all see in short-term loans with the longer term heading down if banks start to lend more which is stimulative for housing, autos, etc. Financials might head down as the spread narrows and they can't just park the money with the Fed. But I think this has already been priced in over the last few weeks.
All the doomsayers coming out of the woodwork will be having a very good day today without really understanding what this is about. I will just enjoy the increase in portfolio value.
http://www.marketwatch.com/story/bernanke-says-fed-likely-to-add-negative-rates-to-recession-fighting-toolkit-2015-12-15