While Bostic 'not a fan' of negative rates, he won’t rule them out

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Some investors recently contemplated negative U.S. Treasury rates and the three-month Treasury yield was negative for a few days, and although Federal Reserve officials have said they oppose negative rates, the possibility of reconsidering them exists.

Federal Reserve Board Chair Jerome Powell has said many times he is against negative rates, while Federal Reserve Bank of Dallas President Robert Kaplan has said he’s skeptical whether negative interest rates are “viable.” Federal Reserve Bank of Minneapolis President Neel Kashkari, back in 2016, said its "unlikely" the Fed would ever implement negative rates.

On the other hand, Federal Reserve Bank of St. Louis President James Bullard has said negative rates could be considered at some point.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in the past that negative rates make him "uncomfortable," but he said Monday he would not rule out their being considered.

Federal Reserve Bank of Atlanta President Raphael Bostic
Federal Reserve Bank of Atlanta President Raphael Bostic said, "every tool is on the table."

“I am not a big fan of negative rates but every tool is on the table, we are not taking anything off the table,” Bostic said on a Zoom call hosted by the Rotary Club of Atlanta on Monday. “For me, negative rates is one of the weaker tools in the toolkit and I would not be supporting that anytime soon.”

He touted the Fed's actions to date to boost markets. “We have been bold and swift in response to the crisis and we are out there right now trying to assess the economy and see what is ahead,” Bostic said. “We will keep working hard to do just that.”

And while the Fed created facilities to support the corporate bond market, money market mutual funds, "the municipal bond markets broadly, to help support state and local governments" and dollar swap markets, he noted monetary policy can’t do everything, so a fiscal response is quite important.

“Fiscal response is powerful and can do things that monetary policy can’t,” he said. “Now the question is what is ahead of us and it’s difficult to predict that, but we are monitoring markets to see where there are weakness, so we can tell lawmakers so that more support can be provided.”

The recovery curve could take many shapes, and in Bostic's mind, three main points will ultimately determine whether it is U, V, L or "swoosh" shaped: “How the virus progresses, how many people get their jobs back and how the reopening goes,” Bostic said. “We are still very much in the relief stage.”

Bostic is also not very worried about inflation in the near future. “Inflation should come one day but I am not expecting that day to come in the next 6-12 months, as we haven’t yet hit our 2% target yet,” he said. “I am not concerned about inflation right now or in the immediate future.”

Survey of consumer expectations
Consumers remain pessimistic, according to the Federal Reserve Bank of New York’s April 2020 Survey of Consumer Expectations.

Median inflation expectations rose at the one-year horizon to 2.6% from 2.5% a month earlier, while at the three-year horizon expectations grew to 2.6% from 2.4%.

Respondents are more worried about losing their jobs, with 20.9% of respondents in April seeing the possibility, the second month in a row this question has hit a series high.

Other data
The Employment Trends Index declined in April to 43.43 from an upwardly revised 57.87 in March. Over the past year, the index is down 60.2%, according to the Conference Board.

“The Employment Trends Index plunged in March and April, with all components of the index moving far into negative territory,” said Gad Levanon, head of the group's labor markets institute. “A decline in jobs of this magnitude is unprecedented. The principal objective of the economy going forward is to accommodate the delicate balance of getting people back to work while minimizing the spread of the virus.”

While millions of workers will return to businesses as they reopen, layoffs will continue for now, he said.

“Beginning in May or June, we expect that the number of workers returning to work will be larger than the number being furloughed or laid off. This would mean the unemployment rate will start to decline,” he said. “At the end of the year, however, the labor market may still be in worse condition than it was at the peak of the Great Recession.”

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