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What Would Negative Rates Really Mean? (NY Fed)

Two NY Fed officials predict the change would spark a number of financial innovations.

If interest rates go negative, as some commentators have proposed in the wake of the weak economic recovery, the change could result in unanticipated financial innovations, according to a blog posting by two vice presidents at the New York Fed, Kenneth Garbade and Jamie McAndrews. If the Fed charged interest on excess bank reserves, pushing short-term rates negative, the post envisions drastic changes that could occur in the U.S. banking and payments.

Even if banks start charging savers to keep money in the bank, holding cash isn’t a feasible alternative for most businesses and governments, Garbade and McAndrews say. But smaller businesses and individuals would likely cash out some of their bank balances, requiring the U.S. Treasury to print more currency. Special-purpose banks that immobilize cash in a vault would likely be established to offer checking accounts.

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