Earlier this month, I asked a former luminary of US monetary policy if he thought interest rates in America might ever tumble into negative territory by design (as a deliberate Federal Reserve policy move rather than the result of a market swing).
"No!" he replied emphatically, explaining that he, and most of his former colleagues, strongly disliked the idea of negative interest rates, never mind the fact that Europe and Japan have been experimenting with them for some time (and President Donald Trump would probably love the Fed to follow suit).
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This is partly, he explained, because he fears that negative rates can distort markets. As the Bank for International Settlements, the central banks' bank, pointed out in a report this week, the use of unconventional monetary policy runs the risk "of eroding incentives for the private sector to maintain adequate buffers against financial stress". But there is also another factor in play: psychology.
When rates turn negative, it can contribute to a sense that markets are stepping "through the looking glass", as Scott Clemons, chief investment strategist for private wealth management at Brown Brothers Harriman, said recently.
The former policy luminary I spoke to argued that this makes people feel so anxious that it undermines the benefit of cheaper loans. "People worry even more," he explained. "It hurts confidence."
For a long time, economists tended to focus on tangible issues such as a country's gross domestic product and the money supply. However, after the 2008 financial crisis, the profession was forced to broaden its outlook.
Most notably, the field of behavioural economics, which had existed for decades, became far more influential, bringing psychological insights into economic models.
As the world has slid into uncharted territory with monetary-policy experiments, some central bankers are pondering how culture and consumer perception are affected. And a few central bank economists, such as Claudio Borio at the BIS, have questioned whether negative rates send a confusing signal to investors. In my view, this is long overdue.
Economists (and journalists) used to assume that central banks influenced the economy simply by controlling the supply and price of money. However, as the anthropologist Douglas Holmes outlines in his book Economy of Words (2013), monetary mechanics is only half the game; the stories that central banks tell us have a strong influence on the economy.
Consider Japan. When deflation emerged there in the 1990s, most economists blamed it on economic contraction and the financial crisis. That was, of course, partly true but I was living in the country at the time and noticed that many business leaders (as well as ordinary people) assumed that the authorities were concealing the level of bad loans in the system.
This created such a corrosive attitude of mistrust that investors assumed prices had further to fall, exacerbating the deflationary conditions. (China should take note given its own bad loan woes.)
Subsequently, the Bank of Japan unleashed monetary policy experiments to combat deflation, including, eventually, negative rates. However, this seemed to have little effect on consumer or corporate psychology; on the contrary, when I interviewed investors there, they seemed to be even more spooked than before, since they feared the radical experimentation suggested the BoJ knew something nasty that they did not.
I suspect something similar has been afoot in Switzerland recently, where rates are currently negative. So too in the eurozone, where the European Central Bank pushed rates further back into negative territory last month.
Economic theory would suggest that negative rates ought to spur more companies and consumers to spend – after all, why would anyone save when banks are charging for holding cash? But you only need to read the German popular press right now to see how unpopular this experiment is.
In fact, the risk is that negative rates simply fuel fears among investors that something is deeply – and permanently - wrong in this Alice-in-Wonderland world.
Is there a solution? The obvious one is for politicians to stop delegating the heavy lifting to the central banks – and to start using other forms of economic stimulus (such as infrastructure spending) and intelligent structural reform to create growth.
No doubt Christine Lagarde, the incoming head of the ECB, will hammer this point home when she arrives. But don't hold your breath that this will happen any time soon given the state of western democracies.
Perhaps central bankers should consider other options. One would be to avoid talking about negative rates and instead use techniques that provide support but which are so complex that mere mortals struggle to understand them (this is partly what quantitative easing has done).
Or, if they must do outlandish things, central bankers should announce an end date and parameters, to counter the impression that consumers are falling into a bottomless hole of bizarre economics.
One thing that does not create positive consumer sentiment is to turn monetary policy into a form of political combat, while muttering about negative rates – or the threat of new recessions. Donald Trump take note; negative (or zero) rates are not a magic wand.
Written by: Gillian Tett
© Financial Times