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Trump Concedes Economic Defeat Trumponomics Will Result In Negative Interest Rates (#GotBitcoin?)

Blaming ‘boneheads’ at the Fed, president says U.S. is missing out on opportunity. Trump Concedes Economic Defeat Trumponomics Will Result In Negative Interest Rates (#GotBitcoin?)

Trump Concedes Economic Defeat Trumponomics Will Result In Negative Interest Rates (#GotBitcoin?)

President Trump renewed his call for lower interest rates and his criticism of the Federal Reserve Wednesday, saying on Twitter that the Fed should reduce rates to “ZERO, or less.”

He said the U.S. should always be paying the lowest rate and complained that the “naivete” of Chairman Jerome Powell and the Fed means that this was a “once in a lifetime opportunity that we are missing because of ‘Boneheads.’”

A Fed spokeswoman declined to comment on the tweets.

After cutting their benchmark interest rate in July by a quarter percentage point, Fed officials are gearing up to cut rates again, likely by another quarter point, at their Sept. 17-18 policy meeting.

Mr. Powell, who has defended the Fed’s independence from political pressure, framed the July decision to lower the Fed’s benchmark short-term rate to a range between 2% and 2.25% as a “mid-cycle adjustment.”

The global growth and trade outlook has deteriorated since then amid an escalation in the trade war with China.

The comments by Mr. Trump mark the latest escalation of his unprecedented attack on the Fed and Mr. Powell, who the president picked for the post in 2017.

The president said last month that the Fed should cut its benchmark interest rate by at least a full percentage point and resume its crisis-era program of buying bonds to lower long-term borrowing costs. Such moves would typically be considered only when the economy faces a substantial downturn.

Trump Concedes Economic Defeat Trumponomics Will Result In Negative Interest Rates (#GotBitcoin?)

Wednesday’s comments are the first time Mr. Trump has called for rates below zero. In response to a reporter’s question several weeks ago, Mr. Trump said he didn’t want negative rates.

Yields in some countries including Germany, France and the Netherlands have fallen below zero already. On Tuesday, JPMorgan Chase & Co. Chief Executive James Dimon said the bank has begun discussing what fees and charges it could introduce if interest rates go to zero or lower. Even during the last recession, the Fed didn’t employ negative rates.

President Trump and White House officials have said they don’t believe the U.S. is headed toward a slowdown, but also have floated other ideas, such as tax cuts, to boost the economy.

A rate cut of the magnitude Mr. Trump is calling for hasn’t happened since the global financial crisis in late 2008.

In comments last week, Mr. Powell said the U.S. economy faced a favorable outlook despite significant risks from weaker global growth and trade uncertainty.

President Trump renewed his call for lower interest rates and his criticism of the Federal Reserve on Wednesday, by pressing for the central bank to cut short-term rates to “ZERO, or less,” negative rates that the U.S. avoided even after the 2008 financial crisis.

For weeks, Mr. Trump has pushed for lower rates to help cushion the economy against fears of a broader global slowdown. On Wednesday, he introduced a different argument for rate cuts by saying it would allow the U.S. to lock in lower interest rates for a longer period of time.

“We should then start to refinance our debt,” he wrote on Twitter, arguing it would reduce interest costs “while at the same time substantially lengthening the term.”

But some economists, including one of Mr. Trump’s former advisers, warned that his push for lower short-term interest rates might make it harder to achieve the stated goal of locking in lower rates, because it could send up long-term Treasury yields.

The tweets marked the latest escalation of Mr. Trump’s pressure on the Fed and attacks on Chairman Jerome Powell, whom the president picked for the post in 2017. Mr. Trump said the U.S. should always be paying the lowest rate and complained that the “naivete” of Mr. Powell and the Fed means that this was a “once in a lifetime opportunity that we are missing because of ‘Boneheads.’ ”

A Fed spokeswoman declined to comment on the tweets. Mr. Powell has previously defended the Fed’s tradition of independence from political pressure.

After cutting their benchmark interest rate in July by a quarter percentage point, Fed officials are gearing up to cut rates again, likely by another quarter point, at their Sept. 17-18 policy meeting.

Mr. Powell framed the July decision to lower the Fed’s benchmark short-term rate to a range between 2% and 2.25% as a “mid-cycle adjustment.” The global growth and trade outlook has deteriorated since then amid an escalation in Mr. Trump’s trade war with China.

Economists warn that pushing short-term interest rates to near zero could signal that Fed officials expect a much deeper economic downturn.

“That could have the unintended consequence of triggering a major drop in confidence in the economy that could precipitate a recession, which would have the opposite effect,” said Diane Swonk, chief economist at Grant Thornton.

Lowering rates all the way to zero now, when the economy is still on solid footing, could also leave the Fed without any ammunition if an actual recession hits, Ms. Swonk said.

Some economists were also skeptical that pushing interest rates to zero would actually lead to lower interest costs on government debt.

Mr. Trump has previously floated the idea of refinancing the U.S.’s nearly $17 trillion in publicly held debt, which has jumped in the wake of Republican tax cuts and bipartisan budget deals that boosted federal deficits.

“I would like to see the rates be low and pay amortization, pay off debt,” Mr. Trump said in an October 2018 interview with The Wall Street Journal, complaining that the Fed had made this difficult by raising rates several times in recent years.

Debt-servicing costs are one of the fastest growing drivers of federal spending: Interest payments have increased nearly 10% so far this fiscal year, totaling $497.2 billion through July, roughly $1.6 billion a day, according to the Treasury Department.

It isn’t exactly clear what Mr. Trump envisions. Sovereign debt is different from mortgage debt, and can’t be renegotiated to reduce monthly payments or pay debt off early. But the Treasury can replace maturing government securities with new, long-term debt at lower interest rates, which could bring down costs.

“The Treasury should start issuing debt in much longer terms,” said Stephen Moore, an economic adviser to Mr. Trump’s 2016 campaign who at one point was under consideration for a slot on the Fed board, in a Wall Street Journal op-ed last month. “This would lock in today’s low interest rates on the national debt for 10, 20, 30 years or perhaps even longer.”

Ernie Tedeschi, an economist at Evercore ISI, said such an idea makes sense, but it is something that the Treasury is already doing. The average length to maturity of publicly held federal debt has risen to 66 months, from 46 months at the height of the 2008 financial crisis.

The Treasury has also asked an advisory group to reconsider the potential benefits of issuing ultra-long bonds, as other countries have done.

Lowering the Fed’s benchmark federal-funds rate to zero wouldn’t automatically translate to lower interest rates on government debt, which is determined by bond markets, Mr. Tedeschi said. While short-term interest costs would likely fall, “it could be that the 10-year [Treasury note] goes up because markets are more confident in the Fed management of the economy,” he said, a shift that would lead to higher interest costs.

Paul Winfree, the director of the Heritage Foundation’s Roe Institute for Economic Policy Studies and a former budget adviser to Mr. Trump, said the president’s argument is “economically inaccurate.”

“Treasury has to offer interest rates that will attract buyers,” he said. “If all of a sudden we decide to roll over all of our debt, well, that will surely influence the interest rate on the debt. Like if all of a sudden every household in America decided to refinance.”

Mr. Trump said last month that the Fed should cut its benchmark interest rate by at least a full percentage point and resume its crisis-era program of buying bonds to lower long-term borrowing costs. Such moves would typically be considered only when the economy faces a substantial downturn.

Wednesday’s comments are the first time Mr. Trump has called for rates below zero. In response to a reporter’s question several weeks ago, Mr. Trump said he didn’t want negative rates.

Yields in some countries, including Germany, France and the Netherlands, have fallen below zero already. On Tuesday, JPMorgan Chase & Co. Chief Executive James Dimon said the bank has begun discussing what fees and charges it could introduce if interest rates go to zero or lower. Even during the last recession, the Fed didn’t employ negative rates.

Mr. Trump and White House officials have said they don’t believe the U.S. is headed toward a slowdown, but also have floated other ideas, such as tax cuts, to boost the economy.

A rate cut of the magnitude Mr. Trump is calling for hasn’t happened since the global financial crisis in late 2008.

Trump Concedes Economic Defeat Trumponomics Will Result In Negative Interest Rates (#GotBitcoin?)

Fed’s Mester Warns Low Rates Can Fuel Financial Imbalances vs Trumponomics

In comments last week, Mr. Powell said the U.S. economy faced a favorable outlook despite significant risks from weaker global growth and trade uncertainty.

She echoes concern that low borrowing costs can contribute to asset bubbles, overreliance by companies and households on cheap debt.

Cleveland Fed President Loretta Mester said Thursday there was a risk of financial imbalances developing in an environment of low interest rates and that the central bank had relatively few tools to address such issues outside of monetary policy.

She was referring to a concern among some officials and economists that low borrowing costs can contribute to asset bubbles, overreliance by companies and households on cheap debt and excessive risk-taking by economic actors.

“You have to recognize that, if you’re running very low interest rates, that you may be creating some financial imbalances that may come back to haunt you in the future,” Ms. Mester said on a panel at the Brookings Institution.

In theory, Ms. Mester said, authorities would be able to use so-called “macroprudential” mechanisms such as closer oversight and targeted regulations to safeguard against instability in the financial sector, rather than the blunt instrument of interest rates.

But, in practice, “that’s a hard thing to do because we don’t really have that many macro-prudential tools,” she said.

Ms. Mester reiterated the Federal Reserve’s general view that financial risks are manageable at the moment, notwithstanding “some issues” related to high levels of corporate debt and elevated pricing for commercial real estate.

She didn’t comment on the Fed’s current interest-rate policy.

Updated: 10-15-2019

Fed Paper Says Negative Rate Policy Can Provide Real Stimulus

U.S. might have benefited from a negative rate policy during financial crisis, San Francisco Fed paper says

Negative interest rates are a viable tool to provide stimulus to economies that need it, and the U.S. might have benefited from using it during the financial crisis, a new report from the San Francisco Fed said Tuesday.

“Analyzing financial market reactions to the introduction of negative interest rates shows that the entire yield curve for government bonds in those economies tends to shift lower,” writes bank economist Jens Christensen. “This suggests that negative rates may be an effective monetary policy tool to help ease financial conditions.”

Negative short-term term rate policies are controversial and thus far haven’t been tried in the U.S. But variations are in place in other nations.

In normal times, central banks seek to influence their respective economies through changes in positive short-term rate targets. Right now, the Fed’s target rate range is set between 1.75% and 2%.

But changes in how economies are structured, as well as demographic shifts and other factors, have created an environment where short-term rates are lower than they have historically been. That means when a central bank confronts trouble, it is more likely to lower rates to zero. In the U.S., during the financial crisis, that so-called zero lower bound was the stopping point for interest-rate policy. The Fed provided additional stimulus via purchases of long-term bonds and guidance about the future of rate policy.

Negative rates upend the normal system wherein lenders are compensated for risk by getting a positive return on their investment. With negative rates, borrowers get paid to take loans, rather than the other way around. Central banks pursue negative rates to induce those sitting on cash to put it to work, hoping that will boost activity, rather than see their holdings diminished by the negative rates. Rates under zero also help lower market-based borrowing costs.

The European Central Bank’s deposit facility rate now stands at minus 0.5%. The Bank of Japan also has a negative policy rate.

The San Francisco Fed paper looked at bond markets affected by the negative rate policies of the Danish National Bank, the ECB, the Swiss National Bank, the Swedish Riksbank and the Bank of Japan.

“The entire cross section of government bond yields tends to exhibit an immediate and persistent negative response to the introduction of this policy tool,” Mr. Christensen wrote. “Negative interest rates therefore appear to be a powerful monetary policy tool that could help ease financial conditions when interest rates would otherwise be stuck at zero as the perceived lower bound.”

The economist said the U.S. could have benefited from negative rates during the financial crisis. “Mildly negative U.S. policy rates from 2009 to 2011 could have supported higher economic growth and eventually pushed up inflation closer to the Federal Reserve’s target,” he wrote.

So far this year, the Fed has lowered rates twice and is widely expected to do it again at the end of the month. The already low level of the central bank’s target-rate range has reintroduced speculation about possible negative rates as a tool for the Fed in the future. But top central bankers seem remain as reluctant as ever on that question.

“If we were to find ourselves at some future date again at the effective lower bound—again, not something we are expecting—then I think we would look at using large-scale asset purchases and forward guidance” as the main sources of stimulus, Fed Chairman Jerome Powell said at his press conference after the Fed’s September policy meeting. “I do not think we’d be looking at using negative rates.”

But that isn’t a universally held view. In an interview with the Wall Street Journal on Thursday, Minneapolis Fed leader Neel Kashkari said “we’d have to consider negative rates, if we were in the same position as Europe.” He added that when it comes to negative rate policy, “nobody could ever completely rule it out. But I don’t think it would be one of the first things we do.”

Updated: 10-22-2019

Fiat-To-Crypto ‘Carry Trade’ May Tempt Traders Tired of Negative Interest Rates

With the era of negative interest rates well and truly here, return-hungry investors may increasingly borrow in low-interest fiat currencies and invest in higher-yielding cryptocurrency accounts.

“The fiat-BTC carry trade is the next step in bitcoin growth,” tweeted popular bitcoin quant investor @100trillionUSD on Oct. 10.

A carry trade is a strategy where a trader uses a low-yielding currency to fund a high-yielding investment.

For instance, the yen carry trade was popular in 2004-2008 when the Federal Reserve hiked rates from 1 percent to 5.25 percent and interest rates in Japan were stuck near 0.5 percent.

Investors borrowed in yen to fund dollar-denominated investments. As a result, the yen weakened by 20 percent against the U.S. dollar.

Currently, the carry trade in the FX markets is pretty much dead with almost every advanced nation having interest rates at or below zero.

But that situation bodes well for a new type of carry trade with a crypto twist.

Lucrative Lending…

On the lending side, crypto-asset platforms like Binance, Crypto.com, Celsius Network, BlockFi are paying interest rates on cryptocurrency deposits. They fund this with interest earned from credit lines extended to margin traders and hedgers.

The interest rates are subject to fluctuations, either modified by the platform operator or influenced by the supply-demand mechanics of users interacting with the platform.

For instance, the Bitfinex exchange pays an annual interest rate of 0.66 percent interest on bitcoin deposits and provides loans at 0.59 percent, according to CoinMarketCap’s new Interest tracker.

In a sense, Bitfinex is operating as a commercial bank by charging a higher rate on loans and paying relatively less on deposits. (Think of the old 3-6-3 rule: “borrow at 3 percent, lend at 6 percent, hit the golf course at 3” – except unlike a bank, crypto exchanges never close.)

While Bitfinex is offering 0.66 percent, other platforms are paying significantly higher interest rates on bitcoin deposits, as seen in the chart below.

One possible reason for the disparity is that like a demand deposit at a bank, Bitfinex allows customers to withdraw at any time, whereas other crypto platforms require the money to be locked up for a period for weeks or months. Crypto.com, for instance, is paying 6 percent, but deposits need to be maintained at least for 90 days.

Then again, BlockFi also allows withdrawals any time (it even removed an early withdrawal penalty, allowing one free withdrawal per month) and it is offering an annual interest rate of 6.20 percent.

Meanwhile, crypto lending provider Nexo is offering up to 8 percent yield on deposits of stablecoins DAI, USD Coin (USDC), Paxos Standard (PAX), TrueUSD (TUSD) and Tether (USDT). Stablecoins are cryptocurrencies whose value is pegged to a fiat currency like the U.S. dollar.

…and cheap borrowing
The annual interest rates paid by crypto lending platforms are significantly higher than the rates across the advanced world, as seen below.

Central banks in Europe and Japan are running a negative interest rate policy (NIRP), under which financial institutions are required to pay an interest rate for parking excess reserves with the central bank.

The Swiss National Bank, which introduced negative rates in 2015, currently has the lowest rate in the world at -0.75 percent. The Bank of Japan (BOJ) cut rates to -0.1 percent in January 2016 and has been running the negative interest rate policy ever since.

The yield of -0.12 percent seen on the 10-year Japanese government bond is the side effect of BOJ’s market-distorting policies.

Also, corporate debt yields have recently hit unprecedented lows. For instance, Toyota Finance Corp will be issuing three-year notes at an unprecedented low yield of 0.0000000091 percent, according to Bloomberg. It means a trader buying 1 billion yen of the bonds would not even make 1 yen on maturity.

The situation is somewhat better for investors in the U.S. and U.K., where the target short-term rates set by the central bank stand at 1.75 percent and 0.75 percent, respectively. The benchmark 10-year government bond yields, however, are significantly lower than the interest rates paid by the likes of Nexo and Celsius Network.

More importantly, central banks running NIRP are unlikely to normalize their policy anytime soon, given the bleak outlook for the global economy. The International Monetary Fund (IMF) recently slashed its 2019 global growth forecast to 6 percent – the lowest since 2008.

All-in-all, interest rates across the globe are low and could slide further, boosting the allure of high-yielding crypto deposits.

Halving Factor

Aside from the interest rate differential, there’s another reason borrowing fiat to buy bitcoin could pay off.

In May of next year, the amount of new bitcoin awarded to miners every 10 minutes or so will be cut in half for the third time in the cryptocurrency’s history. Historically, reward halvings have boded well for bitcoin’s price.

The next halving could reduce the amount of new bitcoin added to the market by $51 million per week at current prices, according to Alistair Milne, chief investment officer of Altana Digital Currency Fund.

As of writing, BTC is trading above $8,200, representing 120 percent gains on a year-to-date basis.

And, if the carry trade becomes popular, all else equal BTC should appreciate sharply against the USD, the way the greenback did against the Japanese Yen.

Updated: 10-25-2019

Stanford Prof: Crypto Will Rain on Banks’ Low-Interest Rate Parade

A professor at Stanford Graduate School of Business says cryptocurrencies will put an end to the windfall that banks currently enjoy from low-interest deposits.

In an Oct 24 interview for the university, Dean Witter Distinguished Professor of Finance Darrell Duffies said that one way or another, cryptocurrencies are likely to upend banks’ business model within the next decade.

Major Disruption Inevitable

Professor Duffie said the public should not be misled by the relatively still-low levels of adoption of decentralized cryptocurrencies such as Bitcoin (BTC); nor should they take the pushback against Facebook’s Libra as the sign of a moratorium on major private initiatives.

“The future is coming, and it will be very disruptive to legacy banks that don’t get with the program,” he said.

Whether it in the form of a dollar-backed stablecoin, a Facebook product, or a central bank digital currency, the benefits of the digital asset model will likely mean that banks lose their access to lucrative low-interest deposits within ten years, he said, adding:

“New payment methods will trigger greater competition for deposits. If consumers have faster ways of paying their bills, and merchants can get faster access to their sales revenue without needing a bank, they won’t want to keep as much money in accounts that pay extremely low interest.”

As the report notes, consumers and businesses currently store around $14 trillion in deposits with United States banks alone that pay out an extremely low rate of interest on average.

Banks currently pay less than 0.1% interest on checking and savings accounts, and only a slightly higher rate on one-year certificates of deposit. Meanwhile, the amount banks receive from routine overnight loans has climbed from 0.3% in 2015 to over 2% in 2019.

Slow Adopters Will Fall By The Wayside

This dependence on deposit accounts to process payments by the vast majority of the population ensures huge profits for banks. In addition, banks charge high fees from credit card vendors — a cost that is mostly then passed on to the consumer.

Different models for future central bank digital currencies could also develop in ways that would bypass commercial banks for at least part of the payment process.

And if adoption is driven by the private sector — as with Libra, due to the unprecedented scale effects it has — it could have a huge impact on the status quo.

He argued that the current system is not sustainable and that technology, economics and public pressure will wrest control of the global payment system away from banks.

“The smartest banks will be on the front edge of this, but others will be reluctant to cannibalize their very profitable franchises,” he said. To those banks that are slow on the mark, he cautioned:

“The future is coming, and it’s not good.”

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