The Fed Wants to Test How Banks Would Handle Negative Rates Rich MillerRichMiller28 February 2, 2016 — 8:21 AM PST Three-month Treasury bill rate falls to negative 0.5 percent Very adverse scenario posits harsh worldwide recession As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S. In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period. "The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the central bank said in announcing the stress tests last week. In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis. Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2. But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019. http://www.bloomberg.com/news/artic...zero-is-bank-stress-fed-wants-to-test-in-2016
NIRP can have a positive effect for the world economy: money would be forced to be invested into real goods, instead of hoarding it. Of course govts too benefit from it as they don't need pay interest to the "poor" creditors ;-) Maybe the latter is the real reason... ;-)
It's important to stress that this doesn't mean the Fed is actually contemplating lowering rates to beyond the zero bound, but checking to see how banks would handle rates depressed into negative territory through a financial stress event.
Of course the latter is the reason. Just keep in mind that, while interest rates going negative would make it cheap to borrow, at a certain point (we're already there) it's as cheap as it's going to be - and the debt still has to be repaid. In other words, negative rates don't make it easier to take out debt when you're already saturated with debt. It helps you roll debt over, but eventually even that is exhausted.