Downs on Negative Rates & the Fed

From Glen Downs on Capital Hill:

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“Marty,

 

Just to reinforce your analysis regarding the Fed possibly ceasing to pay interest on excess reserves; I am hearing from friends with close ties to the Fed and from friends on the Hill that individuals representing the TBTF banks are taking that possibility seriously.  In fact, there is actually talk of banks reacting to that prospective change by paying negative interest rates to their depositors should the Fed turn off the excess reserve interest payment spigot.

 

The possibility of the banking industry (or a segment thereof) effectively actually charging depositors for loaning them money begs more than a few questions.  The Fed, having effectively re-liquefied the dealer banks, is trying to find ways to ‘push on a string’.  But the negative interest rate talk that I am hearing would seem to underline just how monumental a task that is.”