www.NegativeInterestRates.com

[Editor’s Note: NO FED EXIT. It’s like  trying to push a string.   Forcing investors out the yield curve and up the risk ladder searching for anemic yields that look attractive relatively speaking.  All good intentions aside, it’s coercion at best and perhaps financial fascism  on the eve of the Econolypse.  Central bankers  need some better ideas that don’t  make matters worse.  The words “experimental” and “central banking” don’t belong in the same sentence or paragraph.  As the rest of the world diddles around with negative interest rates at least the Fed has a distaste for such “stupid stuff”]

“I’m treating [negative rates] as an experiment that we have the luxury to watch from a distance,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in an interview at the Fed’s annual Jackson Hole conference in the Wyoming mountains.

JACKSON HOLE, Wyo.—Federal Reserve officials are turning a cold shoulder to a controversial idea being tried in Japan and much of Europe to boost anemic economies: negative interest rates.

Fed officials don’t think negative rates are needed in the U.S. because the economy and job market are improving, and they are hoping they will never have to use them in the future given their uncertainty about whether the policy works.

Fed Chairwoman Janet Yellen didn’t even mention the idea in a discussion of the Fed’s options for the economy should recession hit the U.S., and other officials speaking on the sidelines of the Fed’s annual retreat here over the weekend made clear it is an approach they would like to avoid.

http://www.wsj.com/articles/feds-dislike-of-negative-interest-rates-points-to-limits-of-stimulus-measures-1472395069

[Editor’s Note] Passing the buck…. the big oy of unintended consequences:

Derivatives users are the latest group to be hurt by negative interest rates as they get penalized for the cash they park at Europe’s biggest clearinghouses. Traders can thank European Central Bank President Mario Draghi.

Futures and swaps are used to hedge or speculate on everything from German interest rates to oil prices. To avoid taking a loss if a counterparty to a trade defaults, they post collateral, such as government bonds or cash, at a clearinghouse. In Europe, the biggest ones are in Frankfurt and London. But with German and U.K. debt yields so low, or even negative, clearinghouse customers are sometimes losing money on those assets.

http://www.bloomberg.com/news/articles/2016-08-24/derivatives-users-hit-as-negative-rates-raise-collateral-costs

Deutsche Bank’s chief executive has warned of the “fatal consequences” of the European Central Bank’s negative interest rate policy, which he said punished savers and could even undermine the recovery.

While Mr Cryan praised the central bank for helping to revive the economy following the financial crisis, he said low rates had dire implications for savers and pension plans.

Mr Cryan said the policies also encouraged companies to “refrain from investments due to ongoing uncertainty”.

http://www.telegraph.co.uk/business/2016/08/24/deutsche-boss-negative-interest-rates-are-fatal/

[Editor’s Note]  So where does the next financial crisis begin?  From a highly interdependent, non-linear, in-deconstructable network of claims, obligations, and obtuse financial transactions and instruments.  Good luck putting Humpty back together again.

from Working Paper #383 (Prasanna Gai and Sujit Kapadia):

In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. The advent of sophisticated financial products, such as credit default swaps and collateralised debt obligations, has heightened the complexity of these balance sheet connections still further. As demonstrated by the financial crisis, especially in relation to the failure of Lehman Brothers and the rescue of American International Group (AIG), these interdependencies have created an environment for feedback elements to generate amplied responses to shocks to the financial system. They have also made it difcult to assess the potential for contagion arising from the behaviour of nancial institutions under distress or from outright default.

[Editor’s Note] As the natural rate of interest (whatever that might be) collapses it signals a triple witching hour for central bankers who credibility and efficacy have been undermined by their own lack of imagination and comprehension that borders on a pre-Copernican financial cosmology. resorting to an experiment in poorly understood negative interest rates and the vast nuclear arsenal of unintended consequences.  Lack of attractive productive investment opportunities, systemic risk and volatility couple with coercing investors to change their natural risk profile are distorting asset prices, investment returns, the yield curve and credit spreads.  Could turn out fine or could make 2007 look like a walk in the park as  there are  no tools left in the monetarists’ toolkit. Fiscal policy takes weay too long to be effective so we might just be SOOL. Don’t be surprised if this doesn’t end well.

From Wall Street Journal

When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance.

The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today’s low interest rates.

Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate. The fact that inflation and growth are now so sluggish despite ultra-easy monetary policy shows that the natural rate has fallen—by 1 to 2.5 percentage points since 2007 in the U.S., Canada, Britain and the eurozone, according to arecent Fed study. Fed policy makers think the U.S. natural rate is 3%, down from 4.5% before the recession. That’s 1.5 percentage points less ammunition to counteract the next shock to the economy.

http://www.wsj.com/articles/central-bankers-main-challenge-staying-relevant-1472056567

WSJ

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age.

http://www.wsj.com/articles/sellers-paradise-companies-build-bonds-for-central-bank-to-buy-1471815100

Debate: Stan Rogoff versus Adam Posen

http://www.barchart.com/video/symbol.php?id=54624&sym=AREX

http://bloom.bg/1SexxBm

Another Hail Mary from the European Central Bank.  This one’s pretty unbelievable:

ECB to Banks: You make a loan we will lend you 30% of the amount for 4 years at -.04% (give or take)

More to come on TLTROs

Australian expat Paul Sheard, the chief global economist at S&P Global in New York, has a comical way of describing the negative interest rate experiments by central banks around the world.

“Negative interest rates is like an Alice in Wonderland concept,” he said.

“It seems to defy normal logic.”

The answer is not negative interest rates, which are failing in Europe and Japan because the policy has “completely bamboozled” people, he added.

http://www.afr.com/markets/sps-paul-sheard-on-why-negative-interest-rates-defy-normal-logic-20160820-gqxhm1