Via the Fed of SF:
Commercial Banks under Persistent Negative Rates
With U.S. policy rates back in the neighborhood of zero, there has been renewed discussion of the potential efficacy of negative monetary policy rates. However, Fed policymakers have expressed skepticism about lowering the federal funds rate into negative territory. Fed Chair Jerome Powell recently stated that “the [Federal Open Market] Committee’s view on negative rates really has not changed. This is not something we are looking at” (Reuters 2020). Meanwhile, Vice Chair John Williams has argued that guidance about the interest rate path or asset buying are more robust policy tools (Wall Street Journal 2020).
One long-standing reservation about negative policy rates is their potentially adverse impact on bank profitability and intermediation activity. It has been well-documented that negative rates squeeze net bank interest margins. Moving policy rates below zero typically push down all lending rates, reducing bank revenue. However, banks—with few exceptions—have been reluctant to alienate their household clients by paying negative nominal rates—effectively charging rather than paying interest—on standard deposits. As a result, banks’ revenue falls more than their funding cost, lowering lending profitability.
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