Lessons from Europe and Japan, via Bloomberg
As the chatter grows around the Fed and whether they will or won't use negative rates the lessons from Europe and Japan may put a dampener on any desire by the Fed to use negative rates. Here are some of the lessons to be learnt:
1. The ECB and BOJ held rates during the COVID-19 panic. By contrast the Fed was able to cut rates by 150bps in March
2. Going down the curve 10year yields for both Germany and Japan have been stuck, but US 10 year yields fell to 0.66% from 1.92% at the end of 2019.
3. Banks get hammered. The Stoxx 600 Europe Banks Index has fallen over 60% since June 2014 when ECB introduced a negative deposit rate to help turn the eurozone economy around. This impacted the profitability of banks and has caused them to retain focus on buying sovereign debt rather than lending to businesses and households.
Hard to justify
So, the case for negative rates is going to be hard for the Fed to justify. Once again it is understandable why central banks are now calling for fiscal stimulus from Govt's. Central banks have just run out of toolkits to help the economy. This feels like a groundshift for me and a new age of Gov't help or will it be 'control?'. In all truth it will most likely be a bit of both. These are interesting times.
What benefits when rates are negative
Gold benefits as the dollar's rates advantage of over no-interest gold become a disadvantage. Real estate with rental incomes stands out as a decent investment in a negative interest rate world and shares yielding high dividends will have more appeal than marginal rewarding bonds.
