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
Which would you want? Competeive devaluations of currencies or competetive NIRP that maintains relative interest rate differentials and maintain relative currency values. Seems easier for a CB to set a deposit rate rather than conduct ops to devalue a currency when the tools are depleted. But i would not know what the effects of NIRP are. However, Zerohedge pointed out that Euro are banks are down 40% since Drahgi Negative rate policy.
If you are concerned that NIRP may not be all it's cracked up to be might be a good time to buy some banks.
I am winging it here because dont have the data but it seems to me banks would be a bad bet with NIRP. Surpisingly curve flattening may occur regardless of what the fed does. Fed raises rates and "greenspan conundrum" again where rates farther out fall in disinflation expectations. We are seeing this now. FED goes NIRP and again whats going to happen further out ? Europes curve looks steep but the absolute value of the spread is small. This cant be good for banks. How can banks make money with these decreasinng spreads. My amateur response would be to lever to the max on the shape of the curve but are not they under more stringetnt capital requirements these days.
a bet on banks is a bet on NIRP. One side thinks NIRP will win, the other side (my side) thinks banks will win. They are not mutually exclusive. (Disclaimer: As always, when making investment decisions, always take into consideration how long you think you will live.)
Other than to save their jobs, keep them off bread lines, and keep their mortgages from resetting at higher rates, and causing then to reset at lower rates, or facilitate the various stimuli that created new jobs, and to create conditions that allowed for refinancing at very favorable, very low, fixed rates; other than that, not much I guess..
I suppose you would have to stress test NIRP in case of a Bernie Sanders win. Imagine a negative deposit rate of say -.1% out five years so that that respective notes auction would maybe yield 0% . New and maturing US debt could be rolled into short term NIRP or 0% yielding notes causing a huge rally in that part of the curve like is presently happening in ZT , the two year note. Mr. Sanders could run a trillion budget deficit per year at less annual debt service obligation than present. Say it aint so.
Yup. Even Food stamps help the rich owners of the supermarkets in depressed areas, because the poor that shop there are relatively immobile, so they are easily taken advantage of.. The poor are bad at managing their food stamp "money". Psychologically paying for food with food stamps causes one to stop paying much attention to prices. The prices at the supermarkets across the tracks are higher than the prices at the fancy super market in the more affluent part of town where the owners of the super markets in the poor part of town live. "Mr. Hoover didn't know money trickled up. Give to the guy at the bottom, and the guy at the top will have it before nightfall. But at least it will have passed through the poor fellow's hands." -- Will Rogers.