On June 10, 2016, just four days after a remarkable Brookings conference on negative interest rates, the Financial Times gave a ringing endorsement of a vigorous use of negative interest rates. The subtitle, “Central banks should be pushing ahead with monetary stimulus,” aptly describes the tenor of the editorial. The strength of this editorial is in directly answering complaints by bankers about negative rates:
Predictably, banks and investors have renewed their complaints that a negative-rate environment is causing havoc with the financial system and risks a cataclysmic cascade of losses if prices fall and yields go up sharply. Some have explicitly blamed central banks such as the Bank of Japan and European Central Bank which have cut short-term interest rates below zero.
These criticisms are wrong-headed. Long-term yields are not heading below zero because central banks are arbitrarily planning to keep short-term interest rates down for years on end. They are reflecting expectations of anaemic nominal economic growth, with both real expansion and inflation strikingly low, for decades ahead.
The answer is not for central banks to abandon the negative-rate experiment but to continue to find every means possible to deliver the stimulus that will increase growth and, with it, inflation and yields.
Further on in the editorial, the Financial Times drives home the message that the need for negative rates is sad, but the negative rates themselves are part of the solution:
Negative short-term rates are not the problem. They are evidence of central banks’ determination to try to address the problem, which is the weak growth and inflation that is driving longer-term yields to zero and below. Investors and policymakers who fail to see this are making a serious mistake.
Bond yields at or below zero are a bad sign. Savers and banks suffering from them should recognise that throwing as much stimulus at the economy as possible is the answer, not raising short-term interest rates to the levels of earlier decades and imagining that the normality of the past will then return.
Right before that, the Financial Times even answers a potential objection that low rates could hurt financial stability:
If they are worried about the distortion in the financial system caused by low or negative rates, they should turn to their macroprudential tools, such as direct controls, to prevent excessive lending against housing, rather than holding rates higher than is warranted by the growth of nominal demand.
Overall, this is a very strong endorsement of negative interest rate policy by the Financial Times editorial board, that bears comparison to, say, Narayana Kocherlakota’s strong endorsement of negative interest rates policy in these Bloomberg View columns:
One reason I think this comparison is apt is that, like the Financial Times editorial board, Narayana still wishes for fiscal policy help along with negative rates, while I argue that going further with negative rates is preferable to relying partially on fiscal policy. You can see my discussion of that here:
I also tend to think that the conventional monetary policy of negative rates should be used instead of relying partially on the term-premium compression of QE.
Once short-run output gaps are close by interest rate policy, then it will be clearer what the appropriate fiscal policy is from a long-run perspective, which I discuss in
- Discounting Government Projects
- One of the Biggest Threats to America’s Future Has the Easiest Fix
- Capital Budgeting: The Powerpoint File
- What to Do When the World Desperately Wants to Lend Us Money,
as well as what kind of financial market interventions along the lines of QE might be appropriate for medium-run or long-run reasons. On that last, see the links in my my post