Ahead of the Jay Powell speech today, Loretta Mester joins Fed President’s Bostic, Evans and Bullard in expressing their belief that negative rates is not a good idea. She spoke last night and said “I still am not thinking that would be a go-to tool for me…I think the effects on the banking system and on money market funds would make me not want to use that as a tool, so I’d rather focus on the other tools we have including forward guidance, including QE.” I hope Jay Powell expresses the same today in an emphatic way so he doesn’t leave it open even as a possibility.
If there is one thing we’ve learned from monetary policy globally over the past 10+ years is that it’s easy to get into new programs and to cut rates. What we’ve also seen is that it’s really hard to reverse this. Here are a few examples: The Fed kept rates at zero for 7 years and never was able to get it back above 2.25-2.5% over a multi year time frame. After expanding above $4T at the peak in 2017, the Fed’s balance sheet never got back below $3.7T and now is of course exploding higher. The ECB has had negative rates since 2014, the Swiss National Bank since 2015 and the BoJ since 2016. The Bank of England beginning in 2007 cut rates from 5.75% to .50% by 2009 and throughout the entire recovery that followed never got it above .75%. The BoJ’s balance sheet is on a never ending rise higher above and beyond the rate of nominal GDP growth. The ECB never stopped expanding its balance sheet once it started via QE and just imagine what will happen to the European bond market if they try to get out of negative rates. They’re trapped.
Where I’m getting at here is now that the Fed is buying private sector assets with corporate bonds, aka nationalizing private assets, I really hope they realize that the deeper they get, the more difficult it will be for them to get out. I understand that in the context of an economic crisis which we are currently in, getting out is not top of mind, only getting in, but I believe it should be an important part of the current conversation before it’s too late.
Keep in mind though that whatever the Fed is doing here is not going to increase a company’s cash flow that is needed to meet their obligations. They can’t print EBITDA needed to pay interest expense. They can’t print jobs. They can’t create anti virals and a vaccine and get people confident to shop without risk until then.
Not understanding the negative consequences of negative rates is the Reserve Bank of New Zealand which late yesterday said negative rates will become an option if needed as they kept their benchmark rate unchanged at .25%.
With mortgage rates still at near record lows, purchase applications rose for a 4th straight week, by 10.6% from the prior week but still remains down 9.5% y/o/y. Refi’s though fell for a 4th straight week, down by 3.3% but is higher by 201% y/o/y. With the challenge of rising forbearance causing havoc in the mortgage market, the purchase side is under less pressure on the assumption that a new buyer is not going to immediately request forbearance has they’ve planned for this big purchase. On the other hand, the risk is higher for an existing homeowner that is looking to refi and thus is harder to pull off in the current environment at an attractive enough rate.
While it’s old news, the UK economy contracted by 2% q/o/q and 1.6% y/o/y in Q1 with the last few weeks of the quarter the obvious weight. These numbers were not as bad as feared but we know Q2 will be the real mess. The pound is higher while gilt yields are lower.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.