At MarketWatch, Peter Morici says it’s crazy for Fed Chairman Jerome Powell and ECB President Mario Draghi to consider taking rates negative, or further negative, as it’s clear that lower rates aren’t working. Morici writes:
If the definition of insanity is to do the same thing over and over and expect a different result, then outgoing European Central Bank President Mario Draghi and Federal Reserve Chairman Jerome Powell, judged by their recent decisions to further ease monetary policy, may be going bats.
However, the real prize should go to President Donald Trump.
Both central bankers are chasing the wrong target — 2% inflation — with interest-rate policies that have demonstrated little effectiveness for at least the last decade.
The 2% inflation target was chosen as a compromise for the tradeoff between inflation and unemployment but that relationship is inherently unstable. Since the financial crisis, inflation has fluctuated mostly below 2% in the United States whether the unemployment rate was 10% or less than 4%, whether the Fed pursued easy money or tightened.
Since 2014, European policy rates below 0% — central banks charging banks for deposits that they must keep at the ECB and other central bank s— have ushered in ultra-cheap loans for businesses. And governments can sell bonds that charge investors for the privilege of lending them money, but those have done little to boost European growth.
Terrible in the long run
Negative interest rates can have a quick short-term positive effect — force banks to make some worthy loans in times of business crisis — but continuing those long term is a terrible idea.
Read more here.