The stock-market rally resumed Thursday, with a 320-point gain in the Dow, fueled by reports of another dose of sweet QE, this time from the ECB’s Mario Draghi. There were also some healthy earnings reports from companies like McDonald’s (MCD) and Microsoft (MSFT).
Only a cynic would say that the market benefited from Vice President Joe Biden’s announcement that he will not run for president, thus reducing the uncertainty that Hillary Clinton will be elected next year.
It is noteworthy that when Clinton spoke out against prescription prices, those stocks were battered, but when she railed against Wall Street, the market did not react.
I am sometimes wrong for not being cynical enough.
I have predicted that far from raising rates, the Fed will maintain accommodation indefinitely and ultimately will expand, rather than reduce, its already bloated portfolio by buying illiquid assets of client firms.
But the term “negative interest rates” has never appeared until today.
In an interview
with Tyler Mathisen, CNBC contributor Ron Insana talked about a piece he has written for CNBC.com
. Mathisen asked why and “who will be paying whom for the right to hold my money?”
Insana noted a Wall Street Journal report that over the last seven years the US Treasury has sold one-month t-bills more than 40 times at 0%, and in the last several months it has sold three-month t-bills at zero. Treasury has borrowed a total of $1.17 trillion for free.
Insana observed: “If the Fed were concerned that the US and global economy was still weakening and could threaten not only the employment outlook, but the inflation outlook further, they could stop paying interest on excess reserves that banks deposit at the Federal Reserve, of which there are about $2.5 trillion. They could even start charging banks to hold their deposits, in which case that money would go immediately back to the banks, possibly move out in the form of new loans, and increase the velocity of money in order to move growth and inflation toward the Fed’s targets.”
Mathisen pointed out that this program would entail greater risk for the banks, but Insana insisted that the banks would make money from these loans.
When Mathisen asked what the odds are that that negative rates would be charged, Insana replied, “We’re getting close. The fact that t-bills are going off at zero, that the Fed is probably on indefinite hold right now given that the European Central Bank’s going to ease more by December. That means the Fed would have a tough time raising rates without having the dollar just explode to the upside. China’s going to ease, Japan’s going to ease, as we heard earlier. And then the real question is, does the Fed need to step on the pedal in order to ensure that the recovery is durable. The US looks fine; the rest of the world still does not, so this is where this comes into play.”
Insana added that “Larry Summers has been making the ‘secular stagnation’ argument for quite some time. Without any fiscal stimulus, which we are unlikely to get, the Fed’s ‘the only game in town.’”
Insana suggested such a policy is “something we have to think about.”
He demurred as to whether it will actually be adopted, but “some of this is already occurring. Not everyone is set up for it, but hedge funds most definitively are beginning to talk about it.” Mathisen concluded, “The war on savers continues,” and Insana said it is happening in Sweden and Switzerland.
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