The bank said that a deep and prolonged recession would warrant negative interest rates, as asset purchases and forward guidance from the Fed would likely not “fill the gap,” unless it started to buy risky assets like stocks.
The argument for cutting interest rates below zero is the same as cutting interest rates above zero: to stimulate demand for credit, which in effect helps stimulate the economy.
The case for negative interest rates in the US has strengthened, according to a note from Goldman Sachs published Tuesday.
“Lowering interest rates eases financial conditions, boosts demand, and reduces debt burdens, helping the economy return to full employment more quickly,” Goldman said.
In previous the recessions, the Fed cut interest rates by over five percentage points. So in a recession that sees the unemployment rate at its highest level since the Great Depression, investors would expect the Fed to cut interest rates by more than five points.
But because interest rates were so low to begin with, the Fed was only able to cut rates by around 1.50 points.
Still, the Fed and Jerome Powell have been steadfast in opposing negative interest rates.
Minutes from a late 2019 Federal Open Market Committee meeting reported, “All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool int he United States.”
Still, they did leave the door open for negative interest rates, saying in the minutes, “… participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates.”
So what would it take for the US Fed to consider negative interest rates?
According to Goldman:
“For the Fed to reconsider, the recession would have to reach the point where weak demand rather than the virus is the main economic problem, the fiscal response would have to fizzle while the unemployment rate is still very high, and a further step-up in asset purchases would have to lose appeal for one reason or another.”
The UK is the latest country to discover the benefits of negative interest rates. Earlier today, the country issued negative debt for the first time ever.