Hurdle to Negative Fed Rates Is Political, Not Legal, Study Says

Margie Patel: No Fed Rate Hike Until Second Half of Year
  • Fed in legal position for negative rates, researchers says
  • Political opposition would focus on customer cost of policy

The U.S. Federal Reserve probably has the legal authority to adopt negative interest rates, although it would face political opposition over deploying such an unconventional monetary tool, according to a study by research firm Federal Financial Analytics Inc.

In congressional testimony this month, Fed Chair Janet Yellen said she wasn’t aware of any law that would stop the central bank from imposing negative interest rates, and the idea warranted more study. The option is being aired after it was adopted by some European central banks and the Bank of Japan to spur growth.

Richard Shelby, a Republican from Alabama who chairs the Senate Banking Committee, said in response to Yellen’s comments that he doubted the Fed can push interest on excess reserves below zero without congressional authority. Congress granted the Fed the ability to pay interest on IOER in 2006.

The question has come up at the Fed before. A 2010 staff memo posted on the central bank’s website late last month showed Fed economists grappled with a number of issues related to implementation of negative rates at the time, including possible legal obstacles.

While the Fed has other options to achieve negative interest rates without using IOER, such as charging sub-zero rates only on certain reserves, or using reverse repurchase agreements, it could face political opposition if the costs of such a policy were passed on to customers, according to the FedFin study released Wednesday.

“If depositors were forced to pay their banks -- which would be the most immediate and most obvious effect -- that would have significant political effect," said FedFin Managing Partner Karen Shaw Petrou.

The Fed is already under political scrutiny: presidential candidates Vermont Senator Bernie Sanders and Ted Cruz, Republican senator from Texas, have both called for sweeping reforms at the central bank.

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