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Yellen doesn't rule out negative rates in letter to Congressman

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(Bloomberg) – Federal Reserve Chair Janet Yellen didn’t rule out using negative rates in a future crisis but emphasized that they would be adopted as a last resort.

In written responses Thursday to questions from Representative Brad Sherman, Yellen said that “while I would not completely rule out the use of negative interest rates in some future very adverse scenario, policy makers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences.”

Sherman submitted his queries following the Fed chief’s Feb. 10 hearing before the House Financial Services Committee, of which he is a Democratic member. It comes at a time when the Fed is debating whether to raise interest rates, even as global economies including the euro area and Japan employ negative-rate policies to stoke economic growth and inflation.

“By some accounts, these policies appear to have provided additional policy accommodation,” Yellen wrote. “We certainly are trying to learn as much as we can from the experience of other countries.”

Sherman had asked what the Federal Open Market Committee planned to do in the event of another economic downturn, and whether it has the legal authority to implement negative interest rates. While Yellen didn’t directly address the legality question, Sherman said in a phone interview that he took the response as an “implicit statement that they have legal authority.”

Yellen notes in the letter that many economic downturns have not necessitated extraordinary monetary policy tools, and that policy makers expect that the economy will continue to strengthen and that inflation will return to the Fed’s 2 percent goal over time.

See also:

Federal Reserve leaves door open for June rate increase

Yellen’s scope for summer rate hike widens as ECB signals hold

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