It cant happen here, the saying goes. But when it comes to negative interest rates, the idea that the Federal Reserve wont implement them here in the U.S. appears to be losing ground, judging from two high-profile endorsements of the policy.
Although Fed chief Janet Yellen told the media during her news conference Wednesday that negative rates havent been discussed by U.S. central bankers, in a February statement to Congress she acknowledged, Were taking a look at them again because we would want to be prepared in the event that we needed to add accommodation. I wouldnt take those off the table. But we would have work to do to judge whether they would be workable here.
A good thing, says IMF: And negative rates (NIRP) got a strong endorsement Friday from International Monetary Fund head Christine Lagarde, who said, If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it. It was a good thing to actually implement those negative rates under the current circumstances.
Lagarde was seconded Friday in a blog post by Yellens Fed predecessor, Ben Bernanke, writing for the Brookings Institution in a piece titled What tools does the Fed have left? Part 1: Negative interest rates.
Although saying he is skeptical about deeply negative rates in the U.S., he acknowledged that NIRP might be more powerful than thought.
Manageable, says Bernanke: After outlining concerns about NIRPs potentially adverse effects on money-market funds, bank profits, and the overall financial markets, Bernanke concluded that the anxiety about negative interest rates seen recently in the media and in markets seems to me to be overdone and that any repercussions ought to be manageable.
Bernanke then argues that NIRP would be a reasonable compromise between no action and rolling out the big QE gun.
Remember: Bernanke is the person who in 2007 declared that the subprime-housing market was contained just before the fallout helped create the financial crisis, the TARP bailouts, and the Great Recession. If Bernanke says NIRP is manageable, look out.
Cash ban goes hand-in-hand: NIRP endorsements from Lagarde and Bernanke have followed other recent calls to ban high-denomination currency bills, most notably one-time Fed-chief candidate Larry Summers editorial urging the eradication of the $100 note.
Although Yellen just talked down the notion of NIRP, Lagarde and Bernanke are now running interference for her, keeping the idea in the minds of the media and the public.
Why is NIRP important to gold? If low interest rates are bullish for gold, then negative rates are even more potent. HSBC just published a note arguing that NIRPs growing prevalence will boost bullion.
With an increasing number of central banks implementing a negative rates policy, and this reflecting continued economic weakness, we expect gold to be supported by this backdrop, HSBC analyst James Steel wrote. Negative rates are a sign of distress, which may increase flight-to-quality demand for gold. They lower the opportunity cost of owning gold and therefore encourage purchases.
Rally may last longer, says bank: HSBCs note also points out that gold historically has rallied for 100 days after the Fed has started lifting rates, which it did in December. Steel thinks that the latest statement from the Fed that it will only likely hike twice this year will prolong that effect on gold. Given that rate hike expectations continue to be pushed into the future (HSBC economists expect the next hike in June), we expect the rally may last longer than it has historically.
And with the Feds dovish statement Wednesday also pressuring the dollar, sending it into its worst slump since 2011, HSBC thinks the yellow metals 2016 bull run will be sustained. Moreover, the coming of negative rates in the U.S. likely could light a massive fire under the gold price going forward.