OFR on Negative Rates; FOMC Minutes
The U.S. Treasury's Office of Financial Research released its "Markets Monitor newsletter for Q1'16. In it, they briefly discuss negative rates and European money funds. The OFR writes, "Will other central banks "go negative"? Some European central banks have already introduced negative interest rates in recent years. The news in Japan raised the possibility that other major central banks might follow suit as global growth slows. Since the Bank of Japan's decision in January, central banks in Canada and Norway have discussed negative rates as policy options and the European Central Bank cut rates further into negative territory. Expectations for negative rates in the United States remain very low. In the March FOMC press conference, Federal Reserve Chair Janet Yellen said the central bank is "not actively considering negative rates" and that other options could be used if the economic outlook called for more stimulus. Although market expectations for the federal funds rate have declined, the expected path is still well above zero." It continues, "To date, market participants have not reported major disruptions in the European economies with negative rates. There have been no reports of major shifts in market structure or functioning. Negative policy rates have been successfully transmitted to interbank rates, repurchase agreement rates, and foreign exchange basis swap rates. In some cases, banks have passed on the negative rates to corporate depositors, but generally not to retail depositors. However, these experiences with negative rates have been too limited to rule out disruptions in the future or in other markets. Policy rates have been only modestly negative so far -- lower negative rates could cause greater withdrawals by savers and investors. Similarly, most of these economies have had negative rates for less than a year, and longer-term responses could be different. Meanwhile, some of the observed responses to negative rates may increase risks over time. European money market funds have expanded their investments outside Europe to find yield. This strategy may increase currency risk in these funds. Some European companies are exploring cutting cash balances to reduce the impact of negative rates. Japanese money market funds have had heavy investor withdrawals in recent months, forcing some funds to close. More fund closures could reduce liquidity in Japan's short-term funding markets. In addition, the reductions in interest rates in Europe and other foreign countries may spill over to U.S. interest rates. Long-term U.S. Treasury yields and term premiums fell markedly in the first quarter, and they are again near historic lows. As discussed in the OFR's 2015 Financial Stability Report, the continued low level of U.S. long-term interest rates is a source of financial stability risk." In other news, the Federal Reserve released the Minutes from its March 15-16 FOMC meeting.
