WEBVTT - Episode 25: Negative Rates -- Another (Delayed) 2008 Hangover 0:00:00.080 --> 0:00:02.120 People want to know what the men can do in 0:00:02.160 --> 0:00:05.199 case all hell breaks loose in the U. S economy. Essentially, 0:00:09.720 --> 0:00:12.160 this episode is brought to you by Nadex, the Binary 0:00:12.160 --> 0:00:15.320 Options Exchange. Binary Options let you limit your risk and 0:00:15.400 --> 0:00:18.239 trade stock in dissees, commodities for x and more from 0:00:18.239 --> 0:00:21.880 a single account. Nat X is a CFTC regulated exchange 0:00:22.239 --> 0:00:26.520 with transparency, free market data, and fairness guarantee. The future 0:00:26.520 --> 0:00:28.920 of trading is here now at n A d e 0:00:29.200 --> 0:00:32.200 x dot com, futures options and spots. Trading involves risk 0:00:32.320 --> 0:00:41.879 and may not be appropriate for all industrial Hi am, 0:00:41.880 --> 0:00:45.400 welcome back to Bloomberg Benchmark, a podcast about the global economy. 0:00:45.479 --> 0:00:49.720 It is Thursday, February eighteen. I'm Tory Stiwell and economics 0:00:49.800 --> 0:00:52.680 reporter with Bloomberg News in DC, and I'm joined by 0:00:52.760 --> 0:00:57.280 my co Hostito, the acting Tokyo Bureauci and Dan Moss 0:00:57.320 --> 0:01:02.680 are executive editor for International Economics News in New York. Killo, everyone. 0:01:03.480 --> 0:01:07.400 So today we are going to talk about a concept 0:01:07.440 --> 0:01:11.280 that has been an almost inescapable topic in financial news, 0:01:11.319 --> 0:01:14.720 and that is negative interest rate policies a k A 0:01:14.920 --> 0:01:18.160 and n r P a k A nerp AK interest 0:01:18.240 --> 0:01:21.720 rates below zero I prefer nerve out of all of those. 0:01:21.800 --> 0:01:24.119 I think it has a nice ring to it. We've 0:01:24.160 --> 0:01:28.000 gone from zup to ner to tarp their nerve, all 0:01:28.080 --> 0:01:31.320 the acronyms that we love. Basically, it's a policy tool 0:01:31.400 --> 0:01:35.600 that until a couple of years ago, was extremely UNORTHODOXUS. 0:01:35.680 --> 0:01:39.840 Now it's still unorthodox, book becoming less so because some 0:01:39.920 --> 0:01:43.399 central banks are using it now to stimulate their economies 0:01:43.400 --> 0:01:46.200 because they're more or less out of other tools to 0:01:46.319 --> 0:01:50.520 support their economies using more traditional methods. So on January 0:01:50.560 --> 0:01:54.320 twenty nine, the Bank of Japan joined a couple of 0:01:54.360 --> 0:01:58.080 these other central banks in deploying a negative interest rate. 0:01:58.360 --> 0:02:01.800 So it is now part of Tory's favorite NERT club, 0:02:02.080 --> 0:02:06.960 along with the central banks of the year Zone, Sweden, Denmark, 0:02:07.160 --> 0:02:11.120 and Switzerland. And the policy in Japan just went into 0:02:11.120 --> 0:02:14.040 effect this week, so that makes it the perfect time 0:02:14.080 --> 0:02:16.480 of act about it. Yeah, and I also get the 0:02:16.520 --> 0:02:20.320 sense achy that it was a tipping point in terms 0:02:20.360 --> 0:02:24.440 of the popular narrative of negative interest rates until the 0:02:24.520 --> 0:02:27.200 bo J decision, there was a feeling that it was 0:02:27.240 --> 0:02:30.240 a thing that the Scandinavian countries did and that the 0:02:30.320 --> 0:02:33.120 e c B did, but that they were real outlies 0:02:34.040 --> 0:02:37.480 and while you and our team in Tokyo were prepared 0:02:37.520 --> 0:02:40.000 for a surprise from the Bank of Japan, it sure 0:02:40.240 --> 0:02:44.440 wasn't this one. What it's done is it's taken the 0:02:44.480 --> 0:02:47.440 negative interest rate question away from like, oh, we've got 0:02:47.440 --> 0:02:50.320 five questions for Janet Yellen, let's add that one too, 0:02:50.800 --> 0:02:54.720 pretty much the first thing FED officials are asked about. 0:02:54.800 --> 0:02:57.880 And when Bill Dudley confronted this issue the other day, 0:02:58.040 --> 0:03:00.880 he seemed a bit frustrated to be const stantly hearing it. 0:03:02.360 --> 0:03:05.520 And you know, people in Congress have picked up on 0:03:05.560 --> 0:03:08.680 this idea, and Chay Yellen was peppered with questions about 0:03:08.720 --> 0:03:11.680 this last week. I just really get the sense that 0:03:11.840 --> 0:03:15.520 psychologically Japan changed the game on this. That's right. But 0:03:15.560 --> 0:03:18.200 before we get too far, we're going to start out 0:03:18.240 --> 0:03:21.800 with a basic discussion of what negative interest rates even 0:03:21.880 --> 0:03:24.680 are and how exactly they work. And for that we 0:03:24.760 --> 0:03:28.000 are welcoming Karen Sho Patrow, who's here in d C 0:03:28.280 --> 0:03:32.160 with me. Karen is co founder of Federal Financial Analytics. 0:03:32.320 --> 0:03:37.000 Her firm advises financial services firms on political and regulatory risk, 0:03:37.160 --> 0:03:41.720 and negative interest rates certainly could fall into that category. Karen, welcome, 0:03:42.000 --> 0:03:45.200 Thanks very much. Story so let's start with just a 0:03:45.360 --> 0:03:50.160 very basic definition and explanation of what negative interest rates are, 0:03:50.200 --> 0:03:53.200 because it is a pretty topsy turvy concept to think about, 0:03:53.640 --> 0:03:56.200 just like how we deposit our extra cash in a 0:03:56.280 --> 0:03:59.800 bank and the bank pays us interests. Banks themselves have 0:04:00.000 --> 0:04:02.680 their own bank to park their excess money, which is 0:04:02.880 --> 0:04:05.480 the central bank or the Federal Reserve for us, and 0:04:05.640 --> 0:04:08.760 policymakers can move the interest rate they pay up or 0:04:08.800 --> 0:04:13.200 down right, hockey right, And so we don't confuse everyone. 0:04:13.280 --> 0:04:15.600 These are a lot of different kinds of interest rates. 0:04:15.840 --> 0:04:19.640 This isn't the same interest rate as the benchmark interest 0:04:19.720 --> 0:04:21.760 rate that we talked about in one of our previous 0:04:21.800 --> 0:04:25.200 episodes on the set. So if you recall that bank 0:04:25.240 --> 0:04:28.000 park interest rate is the rate that bangs borrows from 0:04:28.000 --> 0:04:31.839 each other overnight. This interest rate that we're talking about today, 0:04:32.040 --> 0:04:35.080 which is sometimes called the deposit rate, sometimes called the 0:04:35.120 --> 0:04:38.719 interest on excess reserves, is the rate that central banks 0:04:38.800 --> 0:04:43.080 pay commercial banks to keep cash parked at the central bank. Yes, 0:04:43.200 --> 0:04:46.200 and a negative interest rate here means that a commercial 0:04:46.240 --> 0:04:49.880 bank actually pays the central bank a fee to deposit 0:04:49.960 --> 0:04:52.800 money there. They're being punished for keeping too much money 0:04:52.800 --> 0:04:55.560 sitting idle. Instead of lending it out or doing something 0:04:55.600 --> 0:05:00.640 else useful with it. But you know, totally by making 0:05:00.720 --> 0:05:05.159 depositors pay money. That's right. So, Karen, why would a 0:05:05.200 --> 0:05:08.160 central bank want to do something so strange like this? 0:05:08.279 --> 0:05:12.680 What's the goal? What are the theoretical pros and cons 0:05:12.839 --> 0:05:16.240 of this policy? Well, I think, as Aki said, it's 0:05:16.240 --> 0:05:22.320 a very um crazy, topsy turvy idea to force banks, 0:05:22.600 --> 0:05:26.000 and if that happens to banks, sooner or later, it 0:05:26.040 --> 0:05:29.560 happens to all of us as depositors to pay our 0:05:29.680 --> 0:05:33.680 banks to take our money. And the only reason the 0:05:33.760 --> 0:05:38.040 central banks in other countries, including Japan, went below what's 0:05:38.080 --> 0:05:42.600 called zero lower bound was because they really couldn't think 0:05:42.640 --> 0:05:48.080 of anything else to do in hopes of stimulating economic growth. 0:05:49.080 --> 0:05:53.839 One of the most surprising effects of the crisis, combined 0:05:53.920 --> 0:05:58.640 with all of the really, really difficult economic circumstances we've had, 0:05:59.000 --> 0:06:04.239 is that central bank monetary policy tools are increasingly blunt. 0:06:04.680 --> 0:06:08.040 All the things they know how to do didn't work well. 0:06:08.400 --> 0:06:12.279 And now central banks have thrown trillions of dollars in 0:06:12.360 --> 0:06:15.800 what's called quantitative easing. They bought trillions of dollars. I 0:06:15.839 --> 0:06:19.800 read the other day twenty three trillion dollars of assets. 0:06:19.839 --> 0:06:24.720 Global assets are now housed in central banks, and that's 0:06:24.720 --> 0:06:27.880 an amazing number. And even that's not enough. So this 0:06:27.960 --> 0:06:31.400 is sort of like you know the picturing the DC 0:06:31.560 --> 0:06:35.040 Metro here, and we have the boxes in the cars 0:06:35.040 --> 0:06:37.120 where you have like the glass and you pull down 0:06:37.120 --> 0:06:40.679 a lever in case there's like a giant emergency. That's 0:06:40.760 --> 0:06:45.920 what nerve is for central banks, so much less cateachorismic, 0:06:46.000 --> 0:06:50.440 and I call it a hail Mary pass, but in 0:06:50.520 --> 0:06:55.240 a way having circumstances driven them to a hail Mary pass. 0:06:55.560 --> 0:06:58.600 One consistent feature of the post two thousand a night 0:06:58.720 --> 0:07:03.839 landscape has been the complete absence of inflation. Many people 0:07:03.920 --> 0:07:08.240 said that all this quantitative easing would produce loads of inflation. 0:07:08.360 --> 0:07:11.360 In fact, the opposite is happening. So shouldn't the central 0:07:11.400 --> 0:07:14.760 banks keep swinging even though they cut rights to zero? 0:07:16.720 --> 0:07:18.760 I think one of the things we need to think 0:07:18.840 --> 0:07:21.840 through and we don't know the answer to yet. But um, 0:07:22.360 --> 0:07:24.360 I'm doing a lot of work on this actually right now, 0:07:24.440 --> 0:07:28.480 because I think the swinging that that could keep swinging. 0:07:28.520 --> 0:07:32.440 The other central banks could keep swinging. But finance has 0:07:32.600 --> 0:07:35.200 changed a huge amount in the wake of the crisis, 0:07:35.240 --> 0:07:37.920 and every one of the central banks we've talked about 0:07:38.640 --> 0:07:44.160 traditionally executes monetary policy principally through banks, and banks are 0:07:44.320 --> 0:07:47.960 very different institutions than they were from the crisis. There 0:07:47.960 --> 0:07:51.880 are a lot better we hope they're better capitalized, but 0:07:52.200 --> 0:07:56.880 they don't interact with the economy in the way they 0:07:57.040 --> 0:08:00.920 used to US. Banks right now hold well over two 0:08:01.080 --> 0:08:07.640 trillion dollars of excess reserves at the FED, and it's 0:08:07.800 --> 0:08:12.760 largely because they don't know where else to put them. 0:08:12.880 --> 0:08:17.280 So the goal of negative interest rates, then would be 0:08:17.560 --> 0:08:20.680 to force banks to keep less cash on hand and 0:08:20.800 --> 0:08:24.400 lend more of it out, you know, to consumers who 0:08:24.440 --> 0:08:28.800 would spend it, or to companies who want to finance things, 0:08:28.920 --> 0:08:32.320 build things by equipment, do whatever. Um. So, I guess 0:08:32.320 --> 0:08:36.360 the goal is to just stimulate the economy more. That's 0:08:36.360 --> 0:08:39.040 been paying banks a very low rate of return on 0:08:39.120 --> 0:08:42.120 the excess reserves if it went negative, and this is 0:08:42.200 --> 0:08:45.960 exactly why the Bank of Japan went negative. It's basically 0:08:46.520 --> 0:08:49.320 kicking the kid out the front door and saying get 0:08:49.360 --> 0:08:54.440 a job. Yeah. And let's also remember, you know, something 0:08:54.480 --> 0:08:59.080 that thank Japan Governor Corona has been talking about is 0:08:59.559 --> 0:09:03.120 that this is going to bring down borrowing costs um 0:09:03.320 --> 0:09:09.160 for everything. Um, you know the ten year Japanese government bond, 0:09:09.240 --> 0:09:12.600 you know those went in negative territory of US week 0:09:12.600 --> 0:09:15.120 that we talked about a little bit um. So this 0:09:15.200 --> 0:09:19.640 makes borrowing cheaper for everyone, for the companies, for consumers, 0:09:19.920 --> 0:09:23.360 and the hope is this will for more people to 0:09:23.520 --> 0:09:27.480 spend money. As contentious as it's been, Corona is not 0:09:27.600 --> 0:09:31.599 exactly a babe in the woods easy key. Yes. But 0:09:31.679 --> 0:09:34.280 then I think that's a great question. I think that's 0:09:34.320 --> 0:09:37.360 something that we're all asking ourselves right now. This was 0:09:37.400 --> 0:09:42.000 something that very very few people were expecting um before 0:09:42.040 --> 0:09:44.840 the Bank of Japan actually announced the policy in January. 0:09:45.040 --> 0:09:47.280 And you know, kind of the funny thing is when 0:09:47.360 --> 0:09:50.960 the news first broke on the Bank of Japan, my mom, 0:09:51.040 --> 0:09:54.480 who's Japanese and she lives in Tokyo, she texted me 0:09:54.520 --> 0:09:56.439 and she was like, oh my gosh, this sounds like 0:09:56.520 --> 0:09:59.120 a terrible thing. I hate it, and sent me these 0:09:59.160 --> 0:10:05.600 angry and those, and after after the best settled, I 0:10:05.679 --> 0:10:08.640 was explaining to her that this doesn't necessarily mean that 0:10:08.679 --> 0:10:11.640 she herself is going to have to pay money to 0:10:11.720 --> 0:10:14.840 keep money at her own bank. This, you know, is 0:10:15.080 --> 0:10:18.680 something that applies to commercial banks keeping money at a 0:10:18.720 --> 0:10:21.680 central bank. UM. But Karen, could you talk about how 0:10:22.160 --> 0:10:27.840 this policy would theoretically impact consumers with my mom, that's 0:10:27.840 --> 0:10:32.679 a great question right now. For the most part, in 0:10:32.800 --> 0:10:36.760 Europe UM, where negative rates have been in place for 0:10:36.760 --> 0:10:40.600 the longest amount of time, you've got a really difficult 0:10:40.640 --> 0:10:44.840 dilemma because the banks are still paying their depositors really 0:10:44.920 --> 0:10:48.280 tiny amounts of interest to keep funds in the bank. 0:10:49.080 --> 0:10:53.520 But it's only because rates haven't gone super super low 0:10:54.440 --> 0:10:58.960 and because they really fear that if depositors had to 0:10:59.000 --> 0:11:01.840 actually pay the lost of the negative interest rates. The 0:11:01.920 --> 0:11:06.319 banks are bearing depositors which just take their money and leave, 0:11:07.120 --> 0:11:11.760 just keep it under their mattress, keep it under their mattress. Uh, 0:11:12.080 --> 0:11:15.440 spend it, maybe the way the Fed wants, but perhaps 0:11:15.640 --> 0:11:20.360 in sudden uncertain ways. There's been speculations some people might 0:11:20.360 --> 0:11:24.520 put it into bitcoin. Uh, money market funds. I mean, 0:11:24.520 --> 0:11:27.200 there are a lot of places in markets to put money. 0:11:27.200 --> 0:11:30.080 And that's especially true in the United States, where we 0:11:30.120 --> 0:11:34.880 have a very active non bank equivalent of deposits like 0:11:35.160 --> 0:11:41.160 money market mutual funds. So the banks are basically in 0:11:41.360 --> 0:11:46.360 one way, frustrating central bank policy by still paying depositors 0:11:46.400 --> 0:11:50.840 a little bit. But in another sense, they're desperately trying 0:11:50.840 --> 0:11:54.800 to cling to their fundamental purpose, which is taking deposits 0:11:54.840 --> 0:11:57.480 and making loans. Right because if they if they begin 0:11:57.559 --> 0:12:02.000 to charge this interest rate, people just won't deposit money 0:12:02.280 --> 0:12:05.000 with them. Um. And I guess that brings us to 0:12:05.320 --> 0:12:08.880 naturally to kind of the cons of negative interest rates. 0:12:08.880 --> 0:12:12.080 What could go wrong here? What has been something or 0:12:12.120 --> 0:12:14.440 what have been a few things that people have been 0:12:14.520 --> 0:12:16.920 worried about with negative interest rate? And I think cash 0:12:17.040 --> 0:12:19.840 hoarding is sort of one of the chief concerns here, 0:12:19.920 --> 0:12:23.319 both on the part of consumers as well as a 0:12:23.320 --> 0:12:27.559 commercial banks who obviously have a lot more cash to hoard. Uh, 0:12:27.640 --> 0:12:30.960 it seems kind of dangerous if they just keep it 0:12:31.000 --> 0:12:33.319 all in a vault. So where how does that even work? 0:12:33.760 --> 0:12:39.120 A really big mattress. I do think what really worries 0:12:39.240 --> 0:12:43.520 me the most about negative interest rates is how fundamentally 0:12:43.559 --> 0:12:49.120 it changes the structure of economic growth, of taking deposits 0:12:49.160 --> 0:12:53.320 and making loans, of financial intermediation. Do you really trend 0:12:53.400 --> 0:12:56.960 that on its head? You now depositors pay bankers and 0:12:57.000 --> 0:13:02.320 bankers pay borrowers, Well, how does that really work? After 0:13:03.400 --> 0:13:06.240 just a few months maybe it's a short term shock, 0:13:07.080 --> 0:13:12.760 but you're really fundamentally altering the role of banks, empowering 0:13:12.960 --> 0:13:18.400 perhaps other forms of financial intermediation again, like mutual funds 0:13:18.440 --> 0:13:22.760 buying lots of bonds. I don't know, nobody knows. That's 0:13:22.800 --> 0:13:25.760 a great point. Well, now that we have a semi 0:13:25.760 --> 0:13:28.480 form handle on what negative interest rates are, we can 0:13:28.520 --> 0:13:31.640 head into the second part of the show, which is 0:13:31.679 --> 0:13:34.040 all about the countries that are actually using them and 0:13:34.080 --> 0:13:37.120 the results that they've gotten. After a word from our sponsor, 0:13:49.360 --> 0:13:52.920 what do traders want to limit risk, access every opportunity 0:13:52.920 --> 0:13:55.560 and trade on a level playing field. 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So we should probably have at least 0:14:40.480 --> 0:14:44.360 some discussion about what the outcomes have been on those 0:14:44.400 --> 0:14:48.520 countries that have adopted negative interest rates. Now it's a 0:14:48.600 --> 0:14:53.320 relatively recent phenomena given Karen, as you said, it essentially 0:14:53.440 --> 0:14:57.840 upends the economic model. But are there any preliminary lessons 0:14:57.960 --> 0:15:00.320 we can learn? And I guess we're really talking about 0:15:00.680 --> 0:15:06.520 Scandinavia in the Eurozone here. I think the preliminary lessons 0:15:06.560 --> 0:15:11.040 are mostly, in my mind, drawn from the Eurozone because Scandinavia, 0:15:11.120 --> 0:15:15.120 for example, Sweden and are very unusual. In Sweden, for example, 0:15:15.160 --> 0:15:20.560 almost nobody uses physical cash, so the impact of negative 0:15:20.640 --> 0:15:23.240 rates on deposits is very different than it would be 0:15:23.320 --> 0:15:27.680 in the United States or Japan or the Eurozone. And 0:15:27.800 --> 0:15:32.000 the biggest takeaway I see so far, and why I 0:15:32.040 --> 0:15:35.920 think negative rates are such a tremendous threat to financial 0:15:35.920 --> 0:15:38.800 stability if they stay long enough and go deep enough, 0:15:39.760 --> 0:15:44.120 is that it's having a combination of not really promoting 0:15:44.120 --> 0:15:48.520 economic growth. The Eurozone is still bumping along the bottom, 0:15:48.560 --> 0:15:53.000 and it's making banks weaker and weaker. They just cannot 0:15:53.200 --> 0:15:57.600 keep paying for the cost of negative interest rates without 0:15:57.680 --> 0:16:01.200 having places to put the money. Well, if it's such 0:16:01.240 --> 0:16:04.240 a threat, then how did these decisions get made in 0:16:04.280 --> 0:16:07.880 the first place. These are serious people, many have spent 0:16:07.960 --> 0:16:12.600 a lifetime in economic policy making. How did this happen? 0:16:13.160 --> 0:16:16.920 How did we get here? I honestly think it's because 0:16:16.960 --> 0:16:22.880 central bankers think monetary policy, not financial stability. In most 0:16:22.920 --> 0:16:27.040 central banks, those are on two very different tracks. We 0:16:27.200 --> 0:16:29.480 learned the hard way in the crisis that if they're 0:16:29.480 --> 0:16:31.800 on different tracks, you can have a head on collision. 0:16:32.800 --> 0:16:35.840 But it's not in the gut of central bankers to 0:16:35.920 --> 0:16:39.840 think about financial stability. They think about price stability, they 0:16:39.880 --> 0:16:46.480 think about unemployment, and they're not really thinking through how 0:16:46.520 --> 0:16:48.640 money moves through the economy. What do you do with 0:16:48.680 --> 0:16:52.960 the payment system? Is Janet Yellen rightly said last week, Uh, 0:16:53.000 --> 0:16:56.480 these are questions of Eurozone is just doing, you know, 0:16:56.600 --> 0:16:59.480 playing um by the seat of its pants here? They 0:16:59.520 --> 0:17:02.480 don't know. And this is despite the fact that many 0:17:02.520 --> 0:17:07.640 of these central banks have taken on additional regulatory responsibilities 0:17:07.680 --> 0:17:12.000 since the crisis. That's very true, Dan, but I think 0:17:12.040 --> 0:17:14.880 it's new to them and it's not built into their culture. 0:17:14.960 --> 0:17:18.479 And every one of these central bankers came of age 0:17:18.720 --> 0:17:22.159 as a monetary policy expert and a central bank or 0:17:22.200 --> 0:17:25.359 not as a bank regulator. That's the era when inflation 0:17:25.480 --> 0:17:29.919 was the number one problem. That's correct. Acky, Are you 0:17:29.960 --> 0:17:35.480 seeing any of the reverberations from the boj's decision to 0:17:35.640 --> 0:17:38.400 explore negative interest rates. It's pretty early on and they 0:17:38.440 --> 0:17:40.640 just rolled it out this week, But are you seeing 0:17:40.640 --> 0:17:45.560 any impacts there yet? Sure? So? Um I guess the 0:17:45.600 --> 0:17:48.720 biggest impact so far has been in the financial markets. 0:17:49.080 --> 0:17:54.159 Um So, the entire GGB curb the Japanese government, by 0:17:54.280 --> 0:17:57.640 the old curb that's come down. Uh, Like we talked 0:17:57.640 --> 0:18:02.320 about earlier, there is now lightly negative yields on even 0:18:02.480 --> 0:18:07.040 ten year Japanese government bonds, which is completely grandy to 0:18:07.119 --> 0:18:10.760 borrow money for ten years and not have to pay 0:18:11.080 --> 0:18:15.080 any interest. Yeah, it's it's not b R. Expecting a 0:18:15.200 --> 0:18:18.840 drop in some mortgage rates, which should help for the 0:18:18.960 --> 0:18:21.520 Japanese housing market. There are some signs that it was 0:18:21.520 --> 0:18:25.080 flowing bound before the b OJ decisions. You know. The 0:18:25.200 --> 0:18:29.120 interesting thing here is the foreign exchange market, because right 0:18:29.160 --> 0:18:34.160 after the Leaguersjapan decision, the end weakened by a lot, 0:18:34.680 --> 0:18:36.880 But then just a couple of days later, with all 0:18:36.920 --> 0:18:41.480 this volatility and global markets, its strengthened way past where 0:18:41.480 --> 0:18:44.720 it was before the b OJ decision, which gives you 0:18:44.880 --> 0:18:48.200 kind of a sense of how powerless a central bank 0:18:48.280 --> 0:18:51.520 can be in the space of such large market forces. 0:18:51.600 --> 0:18:55.359 And you know, there's this really interesting local opinion poll 0:18:56.040 --> 0:18:58.560 just a couple of days ago, conducted by one of 0:18:58.560 --> 0:19:02.240 the local newspapers, and people were asked, will negative interest 0:19:02.320 --> 0:19:05.400 rates for the Japanese economy? These are Japanese people who 0:19:05.400 --> 0:19:08.639 are being asked, and I don't know, maybe Japanese consumers 0:19:08.640 --> 0:19:12.520 are especially pessimistic, but the vast majority of them said no, 0:19:12.800 --> 0:19:18.040 and only thirteen people said yes that it would be effective. 0:19:18.040 --> 0:19:21.320 Really Palace, I mean, you've talked at about the negative 0:19:21.359 --> 0:19:26.480 impact on Japanese bank stocks, for example. Is that aptance 0:19:26.720 --> 0:19:30.760 or is it diminishing return? It's a great question. I'm 0:19:30.800 --> 0:19:34.639 not sure. Like Karen was talking about earlier, banks have 0:19:34.920 --> 0:19:39.960 already been in this environment of extremely low interest rates 0:19:39.960 --> 0:19:43.360 for a very long time. So by you know, sending 0:19:43.400 --> 0:19:47.600 that into negative territory, even just slightly, it's it's it's 0:19:47.680 --> 0:19:50.520 unclear if that would do a whole lot. But like again, 0:19:50.600 --> 0:19:54.840 this is you know, an extraordinary experiment. Um It's it's 0:19:54.840 --> 0:19:59.320 exciting for us monetary policy journalists, because we haven't seen 0:19:59.359 --> 0:20:02.040 a whole lot of examples in the past, and doing 0:20:02.040 --> 0:20:05.560 this quick calculation, and with the b o J joining 0:20:05.720 --> 0:20:11.199 the links of the prestigious Nerve Club UM, one quarter 0:20:11.480 --> 0:20:14.760 of the global economy is now run by central banks 0:20:14.760 --> 0:20:17.960 that have deployed interest rates. So it's really not the 0:20:18.160 --> 0:20:21.400 fringe thing anymore the way it was in Denmark first 0:20:21.400 --> 0:20:27.159 announced a couple of years ago. I think my question is, Karen, 0:20:27.200 --> 0:20:30.160 do you think more banks are gonna follow? You talked 0:20:30.200 --> 0:20:33.720 about the you know, extraordinary risks that come with this policy, 0:20:33.760 --> 0:20:38.160 but it feels like it's becoming more mainstream. In terms 0:20:38.160 --> 0:20:42.520 of the central banks. I think there are two things 0:20:42.520 --> 0:20:45.480 that can happen. One is the central bank, like the FED, 0:20:45.600 --> 0:20:48.360 picks negative interest rates, and the second is that they're 0:20:48.359 --> 0:20:52.479 imposed on it by market forces and the policy issues. 0:20:52.520 --> 0:20:54.880 I think in the United States, either one of those 0:20:54.920 --> 0:20:58.120 courses has a very different impact, even then in Japan 0:20:58.280 --> 0:21:02.000 because the dollar is the and Schmark currency and treasury 0:21:02.080 --> 0:21:06.600 securities are the safe haven asset in the world. And 0:21:06.680 --> 0:21:09.480 yet is it really such a disaster though, I mean, 0:21:09.680 --> 0:21:12.000 you can walk down a street in Copenhagen, as I 0:21:12.000 --> 0:21:15.439 did about nine months ago and not have any sense 0:21:15.480 --> 0:21:19.560 of impending disaster and a key as you know better 0:21:19.600 --> 0:21:22.919 than anyone, life goes on in Japan. Yeah, that was 0:21:22.960 --> 0:21:26.520 my question too. Have we actually seen anything that catastrophic 0:21:26.680 --> 0:21:29.840 happen from this very unchartered territory that where in has 0:21:29.880 --> 0:21:33.199 anything gone wrong yet? At least not in Japan? But 0:21:33.760 --> 0:21:38.040 you know, the policy went into effect on two days weeks, 0:21:38.200 --> 0:21:42.080 so there's plenty of opportunity for bad things to happen. 0:21:42.160 --> 0:21:45.560 I think, Karen, isn't the concern more kind of what 0:21:45.760 --> 0:21:48.880 happens to the banking system in the long term when 0:21:48.880 --> 0:21:51.600 you keep bit of interest rates around for such a 0:21:51.600 --> 0:21:55.600 long time. That's one of the concerns. It's true, I 0:21:55.640 --> 0:21:58.840 think I said before and then just bears repeating, we've 0:21:58.880 --> 0:22:01.520 never done this before war. And how low you go 0:22:01.720 --> 0:22:04.720 for how long you go in what type of an 0:22:04.760 --> 0:22:08.520 economy I think is going to determine whether or not 0:22:09.440 --> 0:22:13.520 it has good effects those desired by the central banks, 0:22:14.359 --> 0:22:18.520 moderate effects, or really really dangerous ones. And how low 0:22:18.560 --> 0:22:20.879 are we talking here when when we talk about negative 0:22:20.920 --> 0:22:24.080 interest rates? What what do those look like in these 0:22:24.160 --> 0:22:28.320 various countries. Most of the countries they're relatively modest and 0:22:28.400 --> 0:22:32.600 minus twenty five or even fifty basis points. Sweeten justment 0:22:32.760 --> 0:22:37.240 went much lower chalking the markets. UH. Switzerland has done this, 0:22:37.280 --> 0:22:40.120 and some of the countries like Switzerland and Denmark are 0:22:40.160 --> 0:22:44.400 also using negative rates, not so much for macroeconomic purposes, 0:22:44.440 --> 0:22:48.560 but for exchange rates stabilization, and some of the analysis 0:22:48.600 --> 0:22:51.040 we've been talking about applies a lot less to them 0:22:51.080 --> 0:22:53.399 because they're doing it for a very different reason than 0:22:53.440 --> 0:22:55.679 the Bank of Japan or the e c B. And 0:22:55.720 --> 0:22:59.639 how low can we go here? I saw study the 0:22:59.680 --> 0:23:03.320 other day that suggested that the United States could take 0:23:03.400 --> 0:23:05.919 rates as low as a minus four point five. But 0:23:06.000 --> 0:23:12.720 that's good, I couldn't finish it well. I think this 0:23:12.800 --> 0:23:14.840 is a great opportunity to bring it back to the US. 0:23:14.920 --> 0:23:16.840 And there is a lot of debate here right now 0:23:17.359 --> 0:23:20.240 about whether or nerve is something that the FED should entertain, 0:23:20.440 --> 0:23:23.439 even though it just initiated a tightening cycle here with 0:23:23.560 --> 0:23:26.400 interest rates. Stocks have been tanking this year, and there's 0:23:26.440 --> 0:23:29.160 a ton of speculation about recession risk, and people want 0:23:29.200 --> 0:23:31.240 to know what the FED can do in case all 0:23:31.320 --> 0:23:34.560 hell breaks loose in the U s economy. Essentially, and 0:23:34.800 --> 0:23:38.320 let's be clear that FED still has room to maneuver 0:23:38.480 --> 0:23:42.680 before it too has to seriously consider negative indust rates. 0:23:42.680 --> 0:23:46.200 It could, you know, maybe do another round of quantitative easing. 0:23:46.359 --> 0:23:48.960 It could cut its benchmark interest rate to where it 0:23:49.040 --> 0:23:52.280 was before the December hike. But you know, Karen, if 0:23:52.320 --> 0:23:54.359 if it comes to it, if things get really bad, 0:23:54.880 --> 0:23:58.200 do you think that FED will seriously consider negative interest 0:23:58.320 --> 0:24:00.959 rates too? And do you think they can even legally 0:24:01.000 --> 0:24:03.440 do it, which was a question that came up last week. 0:24:04.560 --> 0:24:09.000 We know they have seriously considered it because of the 0:24:09.040 --> 0:24:12.080 paperwork that was released a couple of weeks ago showing 0:24:12.119 --> 0:24:15.399 an extensive amount of analysis as well as legal thinking 0:24:15.440 --> 0:24:20.200 about negative interest rate policy. We know there are folks 0:24:20.320 --> 0:24:22.919 at the FED or around the FED, such as former 0:24:23.000 --> 0:24:27.639 Chairman Bernankey, urging the FED to take this seriously. And 0:24:27.680 --> 0:24:30.800 we know Chairman chair Yellen said last week that it's 0:24:30.840 --> 0:24:35.040 a tool. Now. I think, Dan, you're absolutely right. Bill 0:24:35.119 --> 0:24:38.280 Dudley doesn't want to pick it up. And I know 0:24:38.520 --> 0:24:42.360 everyone I talked about the FED is very, very aware 0:24:42.600 --> 0:24:46.040 of what a dramatic shock it would be to the 0:24:46.119 --> 0:24:50.840 market if the FED were to go nurpe. But just 0:24:50.920 --> 0:24:53.680 to sort of take a step back, Karen and help 0:24:53.760 --> 0:24:57.960 us with an overall global document here. Many of the 0:24:58.000 --> 0:25:02.199 central banks we've discussed either are inflation targeters or have 0:25:03.080 --> 0:25:06.960 a version of inflation targeting, and typically that target is 0:25:07.119 --> 0:25:11.080 give or take around two Now they're not close to that, 0:25:11.160 --> 0:25:13.960 They're not remotely close to it. In some instances, it's 0:25:14.000 --> 0:25:17.399 going the other way. I should they just do nothing? 0:25:17.560 --> 0:25:21.159 Is that really a credible response to the ear of 0:25:21.280 --> 0:25:26.600 disinflation slash deflation? Oh? I think nothing would be awful. 0:25:26.720 --> 0:25:33.920 But um, they've got a choice of additional tools. Tories mentioned. 0:25:33.960 --> 0:25:37.080 Some of them might certainly add into accommodate. A policy 0:25:37.080 --> 0:25:42.160 in the United States would be politically controversial. Negative rates 0:25:42.200 --> 0:25:46.359 would be too. There are changes that could be made 0:25:46.400 --> 0:25:49.159 to the regulations, for example, and I know this is 0:25:49.400 --> 0:25:53.199