Dudley, Abate Downplay Negative Rates
Reuters published, "Fed's Dudley dismisses negative US rates, sees economic momentum, which covered a speech Friday by NY Fed President William Dudley. They write, "While recently tighter U.S. financial conditions will factor into the Federal Reserve's upcoming policy decisions, it is "extraordinarily premature" to even talk about using negative interest rates to stimulate the economy, a top Fed official said on Friday. "To me, that's not something that should be part of the conversation right now," New York Fed President William Dudley told reporters at a news conference, when asked about possible use of negative rates. The U.S. economy has "quite a bit" of momentum that will help offset weakness from abroad, he said." The article continues, "I view that what we have been observing is not really reflecting developments so much in the United States as developments abroad." Reuters says, "Several European central banks have pushed rates into negative territory to give an added boost to their economies, and the Bank of Japan recently followed suit. Dudley threw cold water on the idea of the Fed doing the same. "I just find that an extraordinarily premature conversation to be having," he said." Barclays' strategist Joseph Abate also discussed negative rates in his "US Weekly Money Market Update," writing, "We continue to expect two rate hikes this year. That said, and following the recent testimony of Fed Chair Yellen, we outline some of the theoretical and practical issues facing the front end if the Fed were to "go negative".... Given the dislocations, we think that the Fed has other, more effective ways to stimulate the economy -- in particular, QE -- with which they have empirical evidence. Our sense is the Fed would re-adopt QE well before pushing IOER and the RRP rates below zero. Alternatively, it could consider another round of Twist purchases as the Fed has just over $400bn in Treasuries set to mature in its portfolio between now and the end of 2017. It could agree to sell all its holdings that mature through December 2017 -- over say, a year -- and replace them with longer-duration Treasuries in an effort to bring long-term rates lower. With 10y rates already at 1.65%, a medium-sized $400bn Twist program at $33bn/month could generate more stimulus, without as much disruption of negative interest rates."
