US: From ZLB to ELB – Goldman Sachs

By FXStreet Research Team at Goldman Sachs, continues to expect the Fed to resume rate hikes later this year, probably in June.

Key Quotes

“Recently, however, investor attention has turned to the policy tools that would be available in the event of a US recession, and specifically whether negative interest rates would be an option.

Fed officials were once skeptical that significantly negative rates were even achievable. Recently, however, foreign experience has shown that policy rates can go much further into negative territory than once assumed without provoking widespread cash hoarding. The zero lower bound (ZLB) has been replaced by the effective lower bound (ELB).

For the most part, the transmission channels through which rate cuts above zero affect the economy seem to apply to rate cuts below zero as well. Negative rates have in most cases led to lower borrowing rates and currency depreciation. However, in some cases negative investor sentiment—likely reflecting a view that negative rates are the last resort of central banks that are “out of bullets”— has led to equity market declines and currency appreciation.

Negative rates present three key risks. First, the combination of increasingly negative deposit rates at the central bank with sticky commercial and retail deposit rates could impose …read more

Source:: FX Street