Fed’s Fischer Says Negative Rates Seem to Work in Today’s Worldby and
Equity prices ‘quite decent’ where policy has been in use
Reiterates that Fed rate increases will depend on data
Federal Reserve Vice Chairman Stanley Fischer said negative interest rates seem to be working in other countries, while reinforcing that they aren’t on the table in the U.S.
While the Fed isn’t “planning to do anything in that direction,” the central banks using them “basically think they’re quite successful,” Fischer said Tuesday on Bloomberg Television with Tom Keene in Washington. He reiterated that Fed rate increases will be data dependent without giving a specific timeline.
Fischer’s comments on negative rates come days after Chair Janet Yellen left the subject out of a speech on the future U.S. monetary policy toolkit, suggesting that they’re not an option that’s up for discussion at the Fed. Fischer is a former Bank of Israel governor and a prominent figure in international economics, so his remarks constitute an important acceptance that the unconventional and often controversial policy might be working in other jurisdictions.
“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”
Fischer’s assessment compares with the views of Mark Carney, the governor of the Bank of England, who earlier this month rejected the idea of negative rates as an effective option. “What we’ve seen in other countries is, to be honest, they’ve got this a bit wrong,” Carney said in a radio interview in early August.
Swiss National Bank President Thomas Jordan has said that negative rates are “absolutely necessary” in his country.
The European Central Bank and the Bank of Japan are relying on stimulus packages that include a negative deposit rate to fuel inflation and revive the economy. ECB President Mario Draghi and BOJ Governor Haruhiko Kuroda have both argued that they have the scope to cut rates further below zero if needed, even as the debate about risks and side effects of the policy gains momentum.
Fischer said that the decisions foreign central banks are making also affect the U.S.
“We’re dealing with interconnectedness, and we are probably the most important of the central banks, but the European Central Bank is operating in about the same level of GDP, and what it does matters a great deal,” Fischer said.
While other central banks ease policy, Fed officials are trying to assess whether they’re close enough to achieving their dual mandate of stable prices -- which they try to hold near 2 percent -- and full employment to justify their second interest-rate increase since the global financial crisis. They moved initially in December, but their plans for subsequent rate increases have been derailed by international developments and a spattering of weak U.S. data points.
Fischer said incoming economic data will determine the trajectory of rate increases.
“The work of the central bank is never done, and I don’t think you can say ‘one and done’ and that’s it,” he said. “We can choose the pace, but we choose the pace on the basis of data that’s coming in.”
Fischer said that the U.S. is close to full employment even as the dollar has strengthened, and while there’s some pessimism about the pace of expansion, “that problem is largely about productivity growth, something which is very hard to control by policy makers. It depends enormously on what private individuals are doing in their companies, and it’s very slow at the moment.”
Click here to listen to a podcast with economist Robert Gordon about productivity growth.
Fischer said he expects productivity growth will accelerate eventually, because “remarkable things” are going on in technology that are not yet reflected in the data.
The policy-setting Federal Open Market Committee meets next on Sept. 20-21 in Washington. The meeting will be followed by a press conference with Yellen and by a fresh set of economic projections by policy makers.