Is the Fed going to go from cautioning about negative interest rates to portraying them as a monetary policy tool that it is perfectly willing to use if needed?
Yes, if the members of the mighty Federal Open Market Committee (FOMC) heed the advice of their former colleague Narayana Kocherlakota.
Kocherlakota, President of the Federal Reserve Bank of Minneapolis from 2009-2015, recommends that his former FMOC colleagues speak in a much more positive tone about negative rates.
His argument is that prior communication should prepare the ground for the Fed to possibly implement what could very well turn out to be a potentially very controversial decision.
The Committee can’t convey that it sees big costs or concerns with negative rates. These kinds of communications create the risk that any decision to go negative would carry the signals ... that the macroeconomic situation is more dire than previously communicated and the Committee lacks confidence in its other methods of providing stimulus.
How then should the FOMC communicate about negative rates? The messaging from Committee leaders should be relentlessly positive. It is reasonable to highlight that Federal Reserve staff are studying whether negative rates would in fact stimulate aggregate demand in the US, given the ability of banks and others to substitute into cash ... FOMC leaders should be clear that, as long as negative rates do have a stimulative effect, the Federal Reserve is more than willing to use them as a monetary policy tool.
Well, Kocherlakota had served on the FMOC, so his views carry a lot of weigh. Still, I cannot help to remark that his approach risks taking the Fed to the other extreme - creating a false impression that it is downplaying or even disregarding any risks involved in joining other central banks in going negative.