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ECB Considers Pushing Negative Rates Lower; Yellen Might Follow Lead

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While Janet Yellen keeps hinting at a “possible” US interest rate hike – something Peter Schiff has argued for months is highly unlikely – it appears the European Central Bank (ECB) will soon take rates deeper into negative territory. Americans should take note of what is happening across the pond, because it may eventually happen here.

According to a Reuters report, a consensus is forming at the ECB to drop the interest rate it charges banks in December:

Some argue that a deposit rate cut should even be larger than the 0.1% reduction currently expected in financial markets, the policymakers said. They are keen to exhaust the conventional and more direct monetary policy tool as they also consider amending the 60-billion-euro asset purchase program, a far more contentious issue that they have yet to agree on.”

The ECB cut its deposit rate to negative 0.2% in September 2014. At that point, it said it couldn’t go any lower. But other central banks in Europe have dropped their rates significantly below the ECB rate. For example, in Sweden, the benchmark interest rate sits at negative 0.35%. The Swiss and Danish central banks have cut all the way to negative 0.75%.
One unnamed ECB governing official told Reuters, “Let’s go for a big cut.”

There is no bottom to the deposit rate in the near term. It could be lowered quite sharply still. There must be a bottom but it’s further out.”

Reuters explained the reasoning behind the rate cut discussion:

A rate cut aims to discourage banks from parking money at the central bank and start lending to generate growth. It can also weaken the currency as cash leaves the euro area in search of higher returns, boosting inflation as imports become more expensive.”

Simply put, negative interest rates are ultimately meant to manipulate people into spending instead of saving. If it actually costs money to keep cash in banks, the thought is people will go ahead and spend, thus jump-starting the economy. As we recently reported, people in Sweden are actually keeping cash in their microwaves instead of putting it in the bank to avoid the penalty on saving. But as central planners push toward cashless societies, even this most basic means of self-defense becomes impossible.

In the meantime, the Federal Reserve continues to talk about the “possibility” of a rate hike in December. A “good” jobs report in October fueled the speculation. But digging into the actual numbers reveals some less bullish trends underlying the news. NASDAQ published some highlights from the Liscio Report that shows labor force participation remains flat.

The employment/population ratio rose 0.1 point to 59.3%, which is the average for the first nine months of the year. It’s essentially flat. The participation rate was unchanged at 62.4%, 0.5 point below where it was in January. The month’s strength in payroll employment had no effect on these long-term problems.”

And while October job numbers were better, the overall trend remains tepid.

The yearly gain in employment was unchanged at 2.0% overall, and unchanged at 2.3% for the private sector. October’s strength partly offset August and September’s weakness – but the three-month average payroll gain is now 187,000 – or 181,000 for the private sector. Both are 26,000 below the average for the first six months of the year.”

The fact is, the Fed has talked about raising rates for months and hasn’t pulled the trigger. As Peter Schiff pointed out last week, all of this talk may very well be just more talk.

Just because a rate hike is a possibility doesn’t mean it’s going to happen. It’s been a possibility all year. People thought it was possible they were going to raise rates in March. They didn’t. They thought it was possible they’d do it in June, September. Some people thought they might have raise rates last month. That was possible, but it didn’t happen.”

The ECB’s open discussions about taking rates deeper into negative territory, and the underlying weakness of the US economy, seems to indicate the likelihood the Fed will actually raise rates is really pretty low. If it does pull the trigger, the higher rate won’t likely last long. In fact Jim Rickards argues the economy is already spiraling toward recession. Federal Reserve and Wall Street economists just don’t realize it yet because the models they use to forecast are deeply flawed.

When reality hits them in the face, the Fed may well follow the ECB’s example and plunge into negative rates.

Last week, Yellen admitted as much in testimony before a House committee.

Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the US context.”

Americans would be wise to take Yellen’s talk with a grain of salt and be prepared for continued central bank interventions in the form of rate cuts and quantitative easing.

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