Interest rates around the world are plunging.
Central banks across Europe have cut interest rates into negative territory, to encourage spending and fend off deflation. Most recently, the Swedish Riksbank lowered its repo rate to -0.10% from 0% on Thursday.
Goldman’s Jan Hatzius wrote in a note Thursday that this has raised questions about whether the Federal Reserve will follow the same route.
And as Hatzius sees it, this is “extremely unlikely.”
“Fundamentally, we think the Fed is extremely unlikely to move in this direction, as official commentary suggests that the Fed expects to begin hiking rates in mid-2015. Even if the outlook warranted a dovish shift in monetary policy, we think that forward guidance and (as a back-up option) balance sheet policy would be the tools of choice.”
The ECB’s monetary policy is headed in the opposite direction from the Fed’s. As the Fed prepares to raise interest rates, the ECB is keeping rates low and will start its quantitative easing program in March.
Another key difference between both central banks is in how money market funds work. Money funds assets are much larger in the US and are less likely to be protected against losses in Europe than they are in the US, according to Hatzius.
“The Fed might be worried about creating a situation where the US money fund industry suddenly finds it increasingly difficult to profitably exist in its current form, and results in a potentially disruptive reconfiguration of the current financial plumbing,” Hatzius wrote.
Another implication of negative interest rates is that people would pay banks to hold their savings, but if this were the case, you’d expect US consumers would rather hold cash than put their money in banks to lose money.
Also, a Boston Fed study found that as interest rates fall, US consumers’ demand for cash increases and accelerates as the nominal interest rate approaches zero, Hatzius wrote.
So, forget about negative rates in the US for now.