Nik Martin Interviews Miles Kimball: Trump Wants to Go Negative, but Does the Fed?

On August 19, 2019, Nik Martin interviewed me for the Deutsche Welle on Donald Trump now being an advocate for negative interest rates. You can see the results in the October 29, 2019 article shown above: “Interest rates: Trump wants to go negative, but does the Fed?”

Here are the quotations from me that Nik used in the article:

  • “The severity of the Great Recession was almost entirely due to the fact that we were not yet used to a negative interest rate policy," economist Miles Kimball from the University of Colorado Boulder, told DW. "If rates had been cut to -5% early in 2009, we would have had a strong recovery by mid-2010." Kimball added that a negative rate policy by the Fed would be "a really good guarantee that we wouldn't get into another terrible recession.”

  • "You need to have ways to protect small savers from negative rates. If people know that negative rates won't affect them, they're going to be a lot less riled up." To avoid political blowback, Kimball told DW that Fed subsidies could be used to "make sure small checking and saving accounts never see negative rates and also ensure that bank profits are protected."

  • "It's not like a cut of 10 basis points suddenly becomes magically powerful," Kimball told DW. "But a cut of 600 basis points has always been powerful and it continues to be very powerful in the negative region."

  • Like many of his peers, the University of Colorado Boulder economist doesn't think negative rates will happen before the US election. If the next recession is mild, a negative rate of -1% may be enough to boost demand, he said. In the meantime, he says Trump could do the Fed a favor and continue to champion the benefits of negative rates on social media.

    "Now that he has done a series of favorable tweets, it could dramatically change the attitude of some folks with Republican leanings. Since most Democrats are likely to defer to the Fed in a situation where negative interest rates are needed, that should make policymakers a lot more comfortable."

Here are some quotations that Nik didn’t use:

  • There are no big technical problems with negative interest rate policy, just details that need to be worked out. The big concern is really about political blowback, specifically from folks with more of a leaning towards the Republican Party.

  • If people know that negative rates are not going to happen to regular people in their checking account, then people are going to be a lot less riled up.

  • I think the Fed is making some pre-emptive moves and you know it's not doing everything that Trump says he wants, but it's actually not coming from too different a place than Trump's latest tweet.

  • There are many many other things that President Donald Trump is doing that people should judge him on, come election time. But the business cycle is not one of them.

  • President Trump may actually be accomplishing something that generations' worth of of economics professors never accomplished: to get people to realize that the business cycle is the Fed's responsibility, not the president's.

  • If Donald Trump continues to speak favorably about negative interest rate policy I think it is enormously helpful.

  • A willingness to use deep negative rates would be an excellent guarantee that we wouldn't get into a terrible recession.

  • The severity of the Great Recession was almost entirely due to the fact that we were not yet used to negative interest rate policy.

  • If rates had been cut to -5% early in 2009, we would have had a strong recovery by mid 2010.

  • People are a little silly saying 'If negative interest rate policy is so great why didn't it do more for Japan?' Well a basis point is still a basis point.

  • The same subsidies from the Fed that would incentivize banks to make sure small checking and saving accounts never see negative rates also ensure that bank profits are fine, since negative rates are good for bank balance sheets other than the difficulty banks would have in passing on negative rates to checking and savings accounts. If banks don't need to pass on negative rates to small checking and saving accounts because of this Fed support, there is no more bank profits problem.

  • It all depends on how bad things get. The next recession is most likely to be mild. If it is, minus 100 basis points might well be enough. But the basic rule is that interest rates should be cut as far as needed, or raised as far as needed to get the desired level of aggregate demand.

  • Down to something like -1%, no change in paper currency policy is needed.

    Between -1% and something like -3%, it is important that banks be penalized for excess paper currency withdrawal at the cash window of the central bank (similar to current policy at the Swiss National Bank and the Bank of Japan, though loopholes would have to be closed).

    Below something like -3%, it becomes important to take paper currency off par.

    … the lower the interest rate is, the more costly it becomes to subsidize the provision of zero instead of negative rates in small checking and saving accounts. At some point the fiscal authority may need to help the central bank afford that cost. However, the central bank can probably go ahead and do it and—if necessary—get recapitalized by the fiscal authority later. Some discussions with the fiscal authority about whether they are (a) OK with a lower ceiling on the amount that can get the zero rate, (b) would rather pony up some money, or (c) would rather face some chance of having to recapitalize later could be appropriate.

I referenced many blog posts for Nik:

Of course, I also referenced my aggregator post for negative interest rate policy: