Disagreeing With Fed Chair, Trump Again Touts Negative Interest Rates

Jerome Powell's performance as head of the Federal Reserve has improved, the president said, but stressed he still disagrees with him on lending rates.

WASHINGTON, May 13 (Reuters) ― President Donald Trump on Wednesday said he still strongly believes the Federal Reserve should have negative interest rates, but gave a modicum of approval to Fed Chair Jerome Powell who said earlier in the day the central bank would not lower rates beyond zero.

Trump said Powell, whom he frequently criticizes, has improved in his performance as the Fed’s head, but he still disagrees with Powell when it comes to the lending rate set by the central bank.

Powell earlier on Wednesday said the Fed is still not looking at setting rates below zero, and instead pushed lawmakers to use spending to boost the economy during the deadly coronavirus pandemic.

“The committee’s view on negative rates really has not changed. This is not something that we are looking at,” Powell said in answer to a question during an event hosted by the Peterson Institute for International Economics, as he referenced the Fed’s policy-setting Federal Open Market Committee (FOMC).

A number of major central banks ― including the Bank of Japan and European Central Bank ― have implemented negative-rate policies in the years since the 2007-2009 financial crisis because their sluggish economies have failed to produce the desired level of inflation.

Last week for the first time ever, fed funds futures began reflecting a small chance that negative rate policy would find its way to U.S. shores. The futures market is used both to hedge for and bet outright on the level of the Fed’s benchmark overnight interest rate as far as three years down the road.

Trump has frequently called negative rates a way to limit dollar strength and keep U.S. exports competitive, calling the Fed “Boneheads” last September for failing to pursue the policy.

“As a former real estate developer, the idea of being able to borrow at low or negative rates suits Trump’s mindset,” said Mark Sobel, a longtime former U.S. Treasury and International Monetary Fund official and currency policy expert. “The strong dollar has given him a lever to push for that.”

But Powell, along with several other U.S. policymakers, have rebuffed the idea that a sub-zero policy is on the table. At least six of the 12 presidents of the Fed’s regional banks have shot the idea down, and Powell noted during Wednesday’s event that disregard for it has been the subject of rare unanimity among policymakers.

Officials most recently discussed it during last October’s meeting, Powell said, “and the minutes said that all FOMC participants ― and that’s not a sentence you get to say very often ― all FOMC participants currently did not judge that negative rates ... appear to be an attractive monetary policy tool in the United States.”

Powell said policymakers prefer alternatives such as forward guidance ― or hard signals of how long current policy will remain in place ― and large-scale asset purchases, also known as quantitative easing, or QE.

“We’ve said that we continue to rely on those tools that are tried, and they are now a part of our toolkit,” he said.

Rate futures tempered the pricing for negative rates somewhat after Powell’s remarks. However, a dozen contracts that mature from April 2021 through March 2022 are priced to reflect a fed funds rate of between minus 0.01% and minus 0.025% at contract expiration.

Some analysts threw cold water on the notion that the market was seriously pricing in negative rates.

Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York, said while futures markets “are still pricing it in ... we’re looking at very small volumes in fed funds futures out the curve. Even then you are looking at negative rates of one or two basis points, so it’s not in any way suggestive of a policy move that the market is pricing in.”

Rajappa said this was probably indicative of “hedges that are being put in place in case the Fed goes in that direction.”

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