By Ray Birch
LAKE FOREST, Ill.—While some analysts have suggested negative interest rates could be on the horizon, one economist disagrees, saying the Federal Reserve won’t let rates slip below zero and further slow down lending.
Michael Moebs, economist and CEO at Moebs $ervices, pointed out the Federal Reserve recently unveiled a new tool called Yield Curve Control.
“Yield Curve Control (YCC), which the Fed has yet to employ, is a way for the Federal Reserve through purchases or sales of bonds of various terms to maintain a constant level of bond rates—controlling the yield curve while stimulating the economy,” said Moebs.
Moebs said the tool might at first appear to be similar to quantitative easing (QE), it is not.
“Quantitative easing was attempted by the Fed after the Great Recession,” noted Moebs. “QE was too little, too late, and never did stimulate the economy too much. This is an important time for the Fed to use YCC. The Fed is using money, not rates, to maintain yields, which is far better than its QE tools. The overall aim is to stimulate loans.”
Moebs asserted the Fed does not want negative interest rates “like the failed negative rate approach of the European Economic Union. The Fed does not want to go under zero, which is where the federal funds rate is right now. Instead, the Federal Reserve will use purchases of bonds to prevent the lower end of the yield curve from negative rates, and simultaneously with purchases or sales at the high end of the yield curve, force the rate higher.”
Negative interest rates would certainly lead to a lending slowdown, according to Moebs. As CUToday.info reported, one expert is predicting negative interest rates could be in the offing in the U.S.
Not Without Risk
“Lenders will still lend because they are getting paid for ‘storing’ money and can make money by lending,” Moebs explained. “However, as was found with negative interest rates in the EEU, lenders who have not dealt with negative interest rates move very cautiously to make loans. Why? It’s the normal credit underwriting extreme cautiousness with anything new. Plus, lenders always want a half-dozen other lenders to do it first before they do.”
Michael Moebs
But that isn’t to say the YCC isn’t without risk, said Moebs, noting one concern is the Fed may be too active in controlling the yield curve at various points.
“This crowds out private markets,” he said. “This could distort the signals markets give off with many private traders involved. Critics will also claim this is the Fed overextending into what the market can achieve on its own. If the market expects to have low rates, which is the current situation, why does the Federal Reserve have to keep energizing the situation?”
Moebs emphasized the current state of deposit rates is signaling to the Federal Reserve it’s time to act.
“The deposit rates at banks, credit unions and thrifts have hit bottom. The latest Moebs Report shows rate movement since COVID-19 started in late January 2020,” he said.
A State of Uncertainty
Moebs says data show at the start of the COVID-19 crisis, all depositories were in a state of uncertainty, and over a six-week period financial institutions reacted by making no changes to rates, which he called an “unprecedented pause period.”
“Then rates fell, then another pause the week of March 16. Then 12 weeks of falling rates through June 8,” said Moebs. “Now, three weeks of only two changes. What is going on? Just like the Fed with Yield Curve Control, depositories are signaling to the Fed to not go further with falling rates. FIs could lose deposits, which would reduce lending. By using YCC, the Fed is again wanting to drive the economy forward, making money for lending more available. Depositories are saying the same thing by reaching bottom with deposit rates—they want to deliver as much lending as possible to get the economy fully functioning.
“The Federal Reserve is signaling, especially to CUs, to make auto loans, make mortgage loans, and make home improvement loans,” continued Moebs. “Americans are ready to do their part to get the economy moving again. The lenders who do this will get lifelong relationships with good borrowers. Interest rates are low for borrowers. Raise deposit rates if the CU needs to get money to lend. A moderate uptick in deposit rates could bring lots of deposit dollars.”