In spite of criticism from President Trump, the Federal Reserve has stayed away from negative interest rates, and Fed Chair Powell indicated this wouldn’t change anytime soon.
The trio of rate cuts the Fed undertook last year might have been enough to ward off an economic slump in the short term, but Powell as well as other market observers noted that these interventions leave policymakers with fewer tools to fight a recession.
“It’s become very clear that inflation is the problem that central banks can solve,” Battifarano said, but he pointed to Japan’s prolonged economic slump as a cautionary tale of how negative interest rates can play out long-term. “Not only does it not work, it’s damaging to banks’ traditional spread-lending mode,” he said.
Powell also addressed the one significant change economists picked up on in the statement the bank released, noticing that the Fed shifted from characterizing household spending as “moderate,” rather than “strong.” The Chairman said progress on trade between the U.S. and China, along with the signing of the USMCA were beneficial, but he emphasized that the businesses and markets still perceive cause for concern. “Those are potentially positive things for the economy, without question,” Powell said, but he added that “a sustained reduction in uncertainty over time” would be necessary to pull business investment out of its slump — a reduction that currently is not present.
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