By Brian Kesten
The
Federal Reserve increased the federal funds rate for
the first time in nearly a decade this past December, raising the
target rate from 0-0.25% to 0.25-0.5%. Yet the Fed’s historic move to raise
rates is dwarfed in significance by the actions of the European Central Bank
(ECB), the Bank of Japan (BoJ), and the Swedish Riksbank: the unprecedented negative
interest rate
policy. This marks the first known monetary move below the zero lower bound, previously
thought to be the hard floor on interest rates.
In
effect, the central banks in Europe and Japan are charging fees for holding
required and excess reserves parked at the central bank by domestic financial
institutions. Austerity programs and fiscal deficit fears have stifled growth in
the Eurozone and Japan, so the central banks in these nations essentially bear
the mantle of stimulating economic growth, with fiscal spending and tax
reductions off the table. Before implementing negative interest rates, the ECB,
the BoJ, and the Riksbank engaged in quantitative easing programs, aimed at
flooding financial institutions with liquidity that the commercial banks could
invest in domestic industries in the form of business and home loans.
