New York Fed president William Dudley has dismissed speculation that the US Federal Reserve could adopt negative interest rates as “extraordinarily premature”.
Speaking a day after Fed chair Janet Yellen concluded two days of congressional testimony during which she left open questions on whether the US could follow central banks in Europe and Japan by adopting negative rates, Dudley, a voting member on the Fed’s policymaking committee, struck an optimistic tone.
He said US households and banks are better able to absorb shocks than they were when the last recession hit.
Against a backdrop of supportive US consumer and household debt data released Friday, Dudley added US monetary policy remains “quite accommodative” after the Fed’s decision to raise interest rates in December.
“Key sectors of the US economy, such as the household sector, seem to be in good shape,” he said, repeating Yellen’s assertion that despite market turmoil that’s caused the S&P 500 to lose 10% of its value this year, economic expansions do not simply “die of old age”.
“Expansions end either because a significant inflation risk emerges that requires a sharp tightening of monetary policy, or the economy is adversely impacted by a large shock that cannot be offset by monetary policy in a timely manner,” Dudley said.
“Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks.”
However, Dudley acknowledged inflation lags behind the Fed’s 2% target.
Dudley’s remarks may go some way to calm concern that the US banks could enter “a doom loop” in which negative interest rates established at a central bank level encourage investors to “short” bank stocks, forcing institutions to cut lending which could, in turn, force further liquidity easing by central bankers that serves only to intensify the destructive cycle.
Earlier this week, economists at JP Morgan Chase warned that banks might respond to negative rates by cutting lending. Institutional lenders point out negative rates come at a moment when other avenues of business have been restricted by post-2008 market re-regulation while stock, bond and commodity trading is less profitable.
Negative rate moves in Europe and Japan have gone hand-in-hand with global market turbulence and driven down the bank stocks on both sides of the Atlantic.
On Friday, Deutsche Banke, one of Europe’s worst affected banks with shares down 40% this year, said it would buy back $5.4bn of unsecured debt in a move designed to bolster investor confidence in the German lender’s liquidity and in the value of its securities.
But with little room to manouvre, US bankers are keen to describe a clear distinction between their operations and their European banking counterparts.
Earlier this week, Goldman Sachs president Gary Cohn said the European banks had been “slow” to recapitalize after the 2008 financial crisis and get their financial balance sheet in the “best place it can be”.