Rates Shifting Again?

February 22, 2016

After nine years of historically low rates, the Fed enacted a hike in December and officials spoke confidently of four more increases to come. However, those predictions don’t seem as certain any longer. In fact, the tumult following the initial increase has triggered talk that the Fed could consider moving in the opposite direction. Could the central bank move from increases to negative rates?

Though unusual, the move would not be without precedent in the global market. The Bank of Japan recently moved toward negative rates — a move that came one and half years after the European Central Bank became the first major central bank to venture below zero. Sweden, Denmark and Switzerland have also used the tactic.

The goal of instituting negative rates is to boost the economy. In theory, the move stimulates inflation and creates better lending conditions for businesses as well as individuals. However, several high-ranking Fed officials have indicated negative rates would be considered after alternative options were exercised.

Among these alternatives: taking the funds level the Fed uses to target interest rates back to zero, using forward guidance to limit further economic shakiness, or setting benchmarks that would specifically trigger any further rate hikes. The central bank may also be able to persuade federal lawmakers to use fiscal policy to encourage economic growth.

In addition, the Fed may choose to influence the economy with a fourth round of quantitative easing, or increasing the amount of cash in circulation. In the past, this final option has yielded sharp gains in the stock market. It’s a scenario that would be especially welcome given the disappointing numbers for the Dow in the opening weeks of 2016.

Even with these options and despite the lack of clear evidence to support negative rates, the temptation looms. Fed officials will be monitoring data closely leading up to the March meeting, where a rate hike seems increasingly unlikely. And, given a market that may loosen further for those looking to expand their commercial real estate portfolios, it’s a situation worth keeping an eye on.