Forex Analyses

EUR/USD: Goldman Sachs thinks the Fed may resort to negative interest rates this year

The U.S. Federal Reserve could resort to negative interest rates this year, despite their own current doubts about the risks of this unconventional move, Goldman Sachs analysts told reporters 2 days ago.

When central banks implement negative interest rates, it means that banks are paying to store cash. The idea behind this measure is to stimulate bank lending, inject capital into businesses and stimulate the economy. This has been the ECB’s policy in the euro area since the aftermath of the 2011 banking crisis.

However, part of the financial community is sceptical about the use of this tool, especially over an extended period of time. They believe that negative rates have consequences, such as damage to banks’ balance sheets, which could have a broader impact on the economy. The U.S. Federal Reserve shares this view.

Negative interest rates would carry risks of introducing distortions into the financial system,” according to October FED meeting minutes.

Federal Reserve officials add that “the U.S. financial system is significantly different from that of countries that have implemented a negative interest rate policy, and that negative rates could have more adverse effects on the functioning of markets and financial stability here than abroad“.

However, Jane Hatzius, an economist at Goldman Sachs, told reporters that this could change in the future.

There is still a lot of skepticism in the United States (about negative rates) and I think they would use other tools first. That said, in several years’ time, this debate may also have evolved, depending on what we see in places like Europe and the final verdict on the effectiveness of this tool,” Hatzius says.

Goldman Sachs expects the US economy to grow by more than 2% this year. However, if a recession were to hit in the near term, Hatzius says the Fed could use expectations guidance, quantitative easing and ultimately negative rates to stimulate the economy.

If a recession were to occur at some point in the next few years and interest rates were to approach their current level, there would only be about 150 basis points left for conventional interest rate cuts, which is only about one-third of the usual short-term rate cut,” he says.

Other tools would have to be used,” he explained.

The federal funds rate is between 1.5%-1.75%. The Fed signaled at its 2019 end-of-year meeting that it does not expect to change that rate in 2020. The central bank has also forecast a growth rate of about 2% for this year – slightly below the growth levels seen last year.

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