Janet Yellen, U.S. Federal Reserve chairwoman, said she believes that it is possible to set negative interest rates provided some legal issues should be resolved. Economic woes in the U.S. have been pressing the central bank to find ways to stimulate the economy and encourage market movement.
Yellen said the central bank is not highly concerned of the probable legal issues the regulator would face if it sets negative interest rates, Market Watch reported Feb. 10. Setting negative rates means that, instead of earning interest, banks will have to pay when they deposit an amount at the central bank.
"I would say that remains a question that we still would need to investigate more thoroughly," Yellen was cited as saying in her testimony before the House Financial Committee, referring to the legal issues. "I am not aware of anything that would prevent us from doing it. But I am saying we have not fully investigated the legal issues. That still needs to be done," Yellen added.
Former Federal Reserve Chairman Ben Bernanke considered setting the rates below zero back in 2010 when the economic crisis hit the country. However, the move did not push through as Bernanke showed concern about how negative rates would affect money markets, Market Watch noted.
Other regions and economies have been adopting negative interest rates to stabilize the economy. Most know for setting negative rates is the European Central Bank, which began setting rates below zero back in 2014, The Economist reported in late January. The latest to adopt this move was the Bank of Japan, which set its rate at -0.1% amid continued oil price declines and China's economic downturn.
Economists at JP Morgan said that setting negative rates are somewhat inevitable for the U.S. centrl bank as well as the Bank of England amid slow global economic growth and low inflation, Reuters reported. However, banks may still be able to forge ahead as the negative rates' lower limits are lower than what banks assumed, the economists said in a report.
Economists Malcolm Barr, Bruce Kasman and David Mackie said that the U.S. central bank could set a rate of -1.3%, and the Bank of England, the European Central Bank and the Bank of Japan could go for -2.5%, -4.5% and -3.45%, respectively. They said that these rates could be the default reference rates for markets.
"Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability," the economists said.
