Coming Recession Will Force Fed To Set Interest Rates At Minus Zero
$SCGLY
A coming economic decline could force the Fed to set interest rates Below Zero, that means, banks would be charged for holding cash at the central bank in a frantic attempt to revive growth.
That is the latest outlook from Albert Edwards, global strategist at Societe Generale (OYCMKT:SCGLY), who said he and fellow market bear Bob Janjuah, a senior adviser at Nomura Securities, recently mused over the possibility of rates bottoming at -5 percent.
That would mean replacing Zero interest rate policy, or ZIRP, with negative interest rate policy, NIRP.
“The next US recession will probably arrive sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed,” Mr. Alberts said in a 24 September report. “It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the U.S.”
The Fed has held rates near Zero% since December 2008 when the US economy declined the most since the Great Depression. The following frame of weak growth pushed the central bank into several rounds of “QE,” or buying bonds on the open market to pump more cash into the financial system.
Lower interest rates make it cheaper to borrow, which can help to boost spending and investment.
Since the Fed last week decided to hold rates near Zero+ the S&P 500 declined about 2%, a possible indication that the central bank is losing credibility among participants.
The Fed’s 17 September statement cited concerns about “recent global economic and developments” without mentioning China’s stock market crash and slowing growth which added more layers of complexity for analysts to contemplate.
Credit spreads, or the difference in yield between two bonds of similar maturity but different credit quality, are widening as investors grow concerned about corporate borrowing.
“Clearly the heavy issuance of debt we have seen in recent years to buy back equity is beginning to prompt an investor revolt, typical towards the end of an economic cycle,” Mr. Edwards said. “US companies are levered up like never before.”
China’s economic growth has slowed to a crawl in the critical areas of construction and manufacturing that require raw materials from other countries such as Brazil, Russia, Australia, Saudi Arabia and Indonesia.
Things will get worse, before they get better on the global economic front.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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