The fed funds futures market is pricing in negative U.S. interest rates next year, a scenario the Federal Reserve has said it wants to avoid as many doubt that it would be an effective tool to stimulate growth.
FILE PHOTO: The Federal Reserve building is set against a blue sky, amid the coronavirus disease outbreak, in Washington, U.S., May 1, 2020. REUTERS/Kevin Lamarque
The U.S. central bank slashed the federal funds rate to near zero in March and has launched numerous programs aimed at boosting liquidity and stabilizing financial markets as the U.S. economy reeled from the coronavirus pandemic.Not necessarily. Futures indicate market expectations, but those can change. Futures markets are also highly technical. They will not necessarily reflect what the effective fed funds rate that is bounded by the Fed’s target rate will be. It is currently 0-0.
“If negative interest rates will kill your business, maybe you’re in the business of lending money, I can see how you want to have some insurance against negative interest rates. And this is how they want do it, through the futures market,” he added.Central banks try to control interest rates using monetary policy, although supply-and-demand conditions in the market give investors influence.
The Bank of Japan introduced negative rates in January 2016, partly to prevent an unwelcome yen appreciation from hurting its export-reliant economy. It charges 0.1% interest on a portion of excess reserves financial institutions park with the BoJ. People trying to purchase a home can benefit from lower rates, but also suffer from higher home prices that result from cheaper loans. They also must save more for a deposit. Once they buy, they are exposed to losses if rates change direction and move higher, which typically pushes down house prices.Negative rates help lower borrowing costs. The biggest beneficiary would be the U.S. government, which has been financing its growing deficits with public debt.
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