The NAFCU Journal July-August 2020 - 9

weaken the dollar and therefore make
U.S. exports cheaper in foreign markets.
The European Central Bank (ECB)
introduced negative rates in 2014,
applied to reserve balances held by
institutions in excess of six times
required reserves. European banks have
generally been unable or unwilling to
pass on negative rates to depositors,
resulting in a reduction in earnings. As
of the end of 2019, the Euro Stoxx bank
index had declined 50 percent since
the start of the negative rate policy.
It is believed that lending increased
marginally as a result, but not evenly
across institutions. A study by the ECB
found that banks that relied more on
retail deposits tended to respond more
strongly to the intended incentives of
the negative rate policy, lending more
after the policy was enacted. Banks that
relied more on wholesale funding were
able to pass on negative rates and did
not increase lending by as much.
Japan introduced negative rates in 2016,
applied to any increase in excess reserves
since the policy was implemented. Japan
has had a long and severe shortfall in
inflation. Negative rates were viewed as
a means to promote price growth, but
immediately after announcing the move,
inflation expectations fell.

Will the Fed Do It?

The Fed has repeatedly dismissed the
idea of using negative rates in the U.S.
Recently, the Fed has undertaken a review
of its monetary policy framework, during
which it considered the tools it would
use after reaching the zero lower bound.
The minutes of the October 2019 Federal
Open Market Committee meeting provide some insight:
"All participants judged that negative interest rates currently did not
appear to be an attractive monetary
policy tool in the United States.
Participants commented that there
was limited scope to bring the policy
rate into negative territory, that the
evidence on the beneficial effects of
negative interest rates abroad was
mixed, and that it was unclear what
effects negative rates might have on
the willingness of financial intermediaries to lend and on the spending
plans of households and businesses.
. . . Some participants cautioned that
the financial system in the United
States is considerably different from
those in countries that implemented
negative interest rate policies, and
that negative rates could have more
significant adverse effects on market
functioning and financial stability
here than abroad."

While the Fed did not specify what those
distinctive elements of the U.S. financial
system are that make it inhospitable
to negative rates, one possibility is
money market funds (MMFs). Negative
interest rates present serious challenges
for MMFs, and Japanese MMFs have
not fared well since the introduction of
negative rates. MMFs totaled $3.6 trillion
at the end of 2019 and play a much larger
role in the U.S. financial system than in
Europe or Japan.
Although the Fed has steadfastly
resisted calls to consider negative
interest rates, long-term rates are likely
to remain low for some time as a result
of the COVID-19 crisis, and possibly
much longer. A study released earlier this year by the Bank of England
reviewed historical records dating back
to the Black Plague and determined that
global real interest rates had been in
secular decline over that entire history.
Based on these findings, the relatively
high real rates of the last half of the
20th century are an outlier, and the
subsequent decline in rates is simply a
reversion to the mean. If this is the case,
the Fed may take another look at the
use of negative rates.
Curt Long is NAFCU's chief economist
and vice president of research.

Index to Advertisers
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THE NAFCU JOURNAL  JULY-AUGUST 2020

Franklin Madison
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Gallagher
Website: www.nafcu.org/Gallagher................................ 19

9


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The NAFCU Journal July-August 2020

Table of Contents for the Digital Edition of The NAFCU Journal July-August 2020

The NAFCU Journal July-August 2020 - Cover1
The NAFCU Journal July-August 2020 - Cover2
The NAFCU Journal July-August 2020 - 1
The NAFCU Journal July-August 2020 - 2
The NAFCU Journal July-August 2020 - 3
The NAFCU Journal July-August 2020 - 4
The NAFCU Journal July-August 2020 - 5
The NAFCU Journal July-August 2020 - 6
The NAFCU Journal July-August 2020 - 7
The NAFCU Journal July-August 2020 - 8
The NAFCU Journal July-August 2020 - 9
The NAFCU Journal July-August 2020 - 10
The NAFCU Journal July-August 2020 - 11
The NAFCU Journal July-August 2020 - 12
The NAFCU Journal July-August 2020 - 13
The NAFCU Journal July-August 2020 - 14
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The NAFCU Journal July-August 2020 - 16
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The NAFCU Journal July-August 2020 - 18
The NAFCU Journal July-August 2020 - 19
The NAFCU Journal July-August 2020 - 20
The NAFCU Journal July-August 2020 - 21
The NAFCU Journal July-August 2020 - 22
The NAFCU Journal July-August 2020 - 23
The NAFCU Journal July-August 2020 - 24
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The NAFCU Journal July-August 2020 - 64
The NAFCU Journal July-August 2020 - Cover3
The NAFCU Journal July-August 2020 - Cover4
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