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.

Read More

March 02, 2016

By Clifford Hwang

On January 29, 2016, the Bank of Japan set negative interest rates, cutting the interest rate to -0.1%.  The European Central Bank along with central banks in Denmark, Sweden, and Switzerland have previously cut interest rates to below zero.  Negative interest rates in effect make it costly to save money and encourage spending, and may be considered a useful short-term tool for central banks.  It will be interesting to see how low interest rates can go, and what effects they will have on banking industry.  In a world of negative interest rates, one must also wonder what effects these interest rates will have on lending and how those deals will be structured. Read more about negative interest rates at BBC.

Read More

February 10, 2016

By Brian Kesten

Even as the U.S. continues to rebound from the financial crisis that began almost a decade ago, the Federal Reserve announced Thursday that the Federal Open Markets Committee (FOMC) would continue to hold rates at the record low. Although thirteen of seventeen Fed officials still believe interest rates should increase in 2015, the Fed held off for at least a few more months. As the global focus on Chinese currency depreciation and stock market tumult continues to send shockwaves through international markets, the Fed pointed to stubborn domestic wage growth and fragile global economic conditions in justifying the non-move.

Progressive economists, such as Joseph Stiglitz, had advocated a rate hold as a means of reducing inequality and protecting worker wage growth, rather than worrying about inflation. On the other hand, the pages of the Financial Times are filled with opinions denouncing the Fed’s skittishness, and questioning the independence of the Fed board altogether.

Read More

September 29, 2015