Financial markets began pricing in a negative U.S. interest rate environment for the first time on Thursday, a place the Federal Reserve is determined not to go, as investors grappled with the economic consequences of the new coronavirus outbreak.
U.S. central bank officials including Chair Jerome Powell have said that they do not see negative rates as appropriate in the United States.
But some investors may be seeing a much worse outcome for the coronavirus-led downturn that could force the Fed to get even more experimental with its crisis response.
“Anything is possible. We’re just in uncharted territories as far as the U.S. economy goes,” said Tom di Galoma, a managing director at Seaport Global Holdings in New York.
Fed funds futures, which are a gauge of where markets expect the Fed’s benchmark overnight lending rate to be, have begun pricing in a slightly negative rate environment beginning in December. <0#FF:>
The U.S. central bank cut its federal funds rate to near zero in March and has launched numerous programs designed to shore up financial markets and backstop the economy as unemployment soars and economic growth crumbles.
San Francisco Fed President Mary Daly said on Thursday the U.S. central bank still has tools to boost the economy, and that people she speaks with do not expect a “V”-shaped recovery.
The Fed is viewed as reluctant to cut rates into negative territory due to concerns such a move may not be effective in stimulating growth, and because it may disrupt the large U.S. money markets.
There is nothing to suggest that negative interest rates would be a suitable option for the United States, Richmond Fed President Thomas Barkin said on Thursday.
“I think negative interest rates have been tried in other places and I haven’t seen anything personally that makes me think they are worth a try here,” Barkin said in an interview with CNBC.
Analysts at TD Securities said that the move on Thursday was likely due to market repositioning or a short squeeze, where people betting on higher rates get trapped and have to cover their positions.
Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Twitter on Wednesday that pressure on the Fed to cut rates below zero will build as the U.S. Treasury ramps up its issuance of short-term debt, but said any move to do so would be “fatal.”