Should the Fed cut rates below zero?

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YOU COULD be forgiven for supposing that the Federal Reserve has already thrown everything—kitchen fixtures included—at the covid-19 downturn. In recent months the Fed has slashed its benchmark interest rate to near zero, bought nearly $3trn in assets and launched a bevy of lending programmes. But America’s central bank appears conservative in one respect. Whereas peers in the euro area and Japan long ago pushed their short-term interest rates into negative territory, the Fed, like the Bank of England, has stayed positive. Now it faces pressure to change course. President Donald Trump has tweeted that the Fed should accept the “gift” of negative rates. Investors’ bets in the derivatives markets signal a belief that rates may eventually drop below zero. Jerome Powell, the Fed’s chairman, still insists that negative rates are not “appropriate or useful” for America. Regardless of whether he holds firm or markets are proved right, a spell in negative territory would not dramatically change the economic outlook.Economists have argued energetically over negative rates since the global financial crisis, when rates around the world first dropped towards zero. Many policy rules—used to estimate an appropriate interest rate based on the rate of …

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