Submitted by John Mauldin via MauldinEconomics.com,

I think it’s possible that the Fed will push rates below zero when the next recession arrives.

I explained why a few months ago in my free weekly column, Thoughts from the Frontline, at Mauldin Economics.

In that regard, something important happened recently. And not many people noticed. I’ll do a quick review to explain.

In Congressional testimony last February, a member of Congress asked Janet Yellen if the Fed had legal authority to use negative interest rates. Her answer was this:

In the spirit of prudent planning we always try to look at what options we would have available to us, either if we needed to tighten policy more rapidly than we expect or the opposite. So we would take a look at [negative rates]. The legal issues I'm not prepared to tell you have been thoroughly examined at this point. I am not aware of anything that would prevent [the Fed from taking interest rates into negative territory]. But I am saying we have not fully investigated the legal issues.

So as of then, Yellen had no firm answer either way.

A few weeks later, she sent a letter to Rep. Brad Sherman (D-CA). He had asked what the Fed intended to do in the next recession and whether it had authority to implement negative rates.

She did not directly answer the legality question, but Sherman took the response to mean that the Fed thought it had the authority. Yellen noted in the letter that negative rates elsewhere seemed to be having an effect.

(I agree that they are having an effect; it’s just that I don’t think it’s a good one.)

Yellen’s claims are a clear sign the Fed is prepared to dive

Fast-forward a few more weeks to Yellen’s June 21 congressional appearance. She stated that the Fed does have legal authority to use negative rates but denied any intent to do so.

“We don't think we are going to have to provide accommodation, and if we do, [negative rates] is not something on our list.”

I’m concerned about the legal authority question. If we are to believe Yellen’s sworn testimony to Congress, we know three things:

  1. As of February, Yellen had not “fully investigated” the legal issues of negative rates.
  2. As of May, Yellen was unwilling to state the Fed had legal authority to go negative.
  3. As of June, Yellen had no doubt the Fed could legally go negative.

When I wrote about this in February, I said the Fed’s legal staff should be disbarred if they hadn’t investigated these legal issues. Clearly they had.

Bottom line: by putting the legal authority question to rest, the Fed is laying the groundwork for taking rates below zero.

I’m sure Yellen was telling the truth when she said in June that the Fed had no such plan. But, plans change.

The Fed says it's data dependent. If the data shows we’re in recession, I think it is very possible the Fed will turn to negative rates to boost the economy.

Except, in my opinion, it won’t work.

The post The Fed Is Preparing For Negative Rates – Here’s The Sign Everyone Missed appeared first on crude-oil.top.