Why can't the Fed lower interest rates below zero?
Because giving someone a loan and paying them to take it isn't a loan anymore.  I'll grant you, some of the treasury bill auctions did slip below 0% -- people paid in slightly more than what the bill would pay out. In as much as this was done by actual investors (and not afore-mentioned helicopter Ben Bernanke keeping the printing presses running hot all night), it was major accounts fearful of the euro disintegrating and banks crashing, and so on, and needing a safe spot to stick their cash for a couple months.  Where the Fed is concerned, that interest rate he's referring to is lending they do to banks. So, how much would you take if you ran a bank and the Fed offered to pay you to take their money? A billion? A trillion? As much as you could cram in your vaults, shove in your pockets, and stuff down your favorite teller's blouse? Yea, me too. "Keep in mind that the Federal Reserve Chairman needs to be very careful with his use of words.  Here's what he said: It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers. So what does that mean? When he says that ""we can't make interest rates lower"", that doesn't mean that it isn't possible. He's saying that our demand for goods is lower than our ability to produce them. Negative interest would actually make that problem worse -- if I know that things will cost less in a month, I'm not going to buy anything. The Fed is incentivizing spending by lowering the cost of capital to zero. By continuing this policy, they are eventually going to bring on inflation, which will reduce the value of the currency -- which gives people and companies that are sitting on money an dis-incentive to continue hoarding it." "If the Federal Reserve were to pay banks to hold money, they would need to get the money from somewhere to do so.  They would have three options: Go to Congress, and request and authorization of funds. As an quasi-independent entity, however, it would be both highly unorthodox for an institution to diminish its own authority by requesting funding, and politically difficult for the Congress to appropriate it. Transfer held-assets  After QE & QE2, the Fed is now the holder of several assets (mortgages and the like) that are already unorthodox for it to hold. It acquired these assets in the first place to soak up excess demand.  If these assets were transferred back to banks, it would have exactly the opposite effect - increasing supply and further suppressing the value of the assets they would be trying to shore up by lowering the interest rate. ""Print money""  The fed could raise the money supply by issuing new bonds. This is inherently inflationary, and while pretty much everyone agrees this isn't bad in the short run, there is already widespread fear that in the long run, QE by itself is going to unleash massive inflation once growth returns anyway.  To keep ""pushing on this string"" would only excerabate these fears, and quite likely turn it into a self-fufilling prophecy. In short, the Fed ""could"" pay banks to hold money, but the political and economic consequences of raising the needed funds to do so would all undermine the institution or the desired effect." Why can't the Fed simply bid more than the bond's maturity value to lower interest rates below zero? The FED could do this but then it would have to buy all the bonds in the market since all other market participants would not be willing to lend money to the government only to receive less money back in the future.  Not everyone has the ability to print unlimited amounts of dollars :)
"Wiki's not entirely accurate.    My conspiracy theorist answer is because the Fed is not a government entity, it gives them increased flexibility with decreased transparency and the ability to do what is necessary to keep the currency/economy afloat under the fiat money system.  A good book I found on this is Ron Paul's ""End the Fed""." This is a good point.  The problem is that we still use the central bank and interest rates to try to control the economy.  This is the part that has failed.  I would suggest adjusting government spending based on the economic situation (down in good times, up in bad times).  I do believe this would prevent recessions but it has never been tried.  only in desperate times like the japanese recession and our great depression does this get tried and in both times has been effective.  This is the difference between monetary and fiscal policy. I agree. Since the Fed has been pursing all kinds of aggressive policies for years it saying things have gotten worse damages their reputation. This means it's either so clear it can't be ignored or is the first step in some other strong measures (leaving QE in place?). Either way, the fact the Fed is saying this is significant. Next year, the Fed plans on unwinding the Bonds and MBS.  They'll ramp up to $50 billion a month.  At the same time we'll be selling Bonds on the market to finance the debt at a rate of $70 billion a month.  I wonder who's going to have the cash to buy the Toxic MBS and the low yield Bonds they'll be unloading on top of the usual Bonds for future debt.  Those Bonds will have to pay double digit rates before anyone will buy them.  Future generations will just get even more screwed the way the Fed has it planned. If such an investment existed, then why would the banks be parking their overnight funds with the Federal Reserve at an interest rate of pretty much nothing? "This is the best tl;dr I could make, [original](https://www.bloomberg.com/view/articles/2017-06-26/what-you-should-know-about-r) reduced by 87%. (I'm a bot) ***** &gt; As the Federal Reserve gradually normalizes its monetary policy, market participants will hear a lot more about r*, the &amp;quot;Neutral rate of interest,&amp;quot; which helps equilibrate financial markets when the economy is growing at potential and inflation remains contained and stable.  &gt; A gradual convergence of the policy rate to that level would allow, to adapt the phrase of Bridgewater Associates&amp;#039; Ray Dalio, a &amp;quot;Beautiful normalization&amp;quot; of monetary policies that is consistent with market stability and soundness.  &gt; While the r* concept is more relevant for advanced countries with mature financial systems, many emerging economies cannot avoid the consequences of related policy shortfalls even though these would be well beyond their borders.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6k3ex6/what_you_should_know_about_r/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~154803 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **financial**^#1 **policy**^#2 **market**^#3 **rate**^#4 **interest**^#5" "This is the best tl;dr I could make, [original](https://www.nytimes.com/2017/07/27/business/dealbook/libor-fca-banks-andrew-bailey.html) reduced by 82%. (I'm a bot) ***** &gt; The one-year Libor, which represents the rate of interest on a loan between banks to be paid back within a year, is the most commonly used index for mortgages in the United States, according to the Consumer Financial Protection Bureau.  &gt; &amp;quot;And while we have given our full support to encouraging panel banks to continue to contribute and maintaining Libor over recent years, we do not think markets can rely on Libor continuing to be available indefinitely.""  &gt; Mr. Bailey said that the regulator had agreed with the panel banks to sustain Libor through 2021 to smooth a transition to new rates.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6r14fz/libor_brought_scandal_greatest_financial_scandal/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~180937 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **Libor**^#1 **rate**^#2 **bank**^#3 **over**^#4 **Financial**^#5" Your thinking is a little extreme!  V could go under... but chances are very remote.  Similarly I can't answer if someone asks if the Feds can go under. Looking at our awesome debt levels and no way to dig out of it, that is definitely a possibility. But will it happen?  Probably no. I disagree with his point about taking too long to tighten. With rates near zero and asset purchasing programs in place, if there were another crisis what tools does the FRB have? Establishing a broad clear path forward is the best course of action so that confidence is restored in the marketplace. Unfortunately things have moved very far very fast and it has increased inequality. If we tightened sooner and a crisis were to occur the FRB (and the US by proxy) would have been hamstrung for a decades; it took us 1 decade on the current path. First of all, that link is nonsense. I recommend you read the actual GAO audit report, which has 16T in *revolving loans* with only (if I recall) about 1.8T in actual loans at any one time. Secondly, every time I check the details of a claim from Bernie Sanders he has stretched the truth far beyond reasonable, mostly to keep his name in the news I expect.  Now, there was nothing that secret about *anything* in that report that was not reported in GAO reports from earlier. This audit was done for political purposes mostly, and the Fed has audits done regularly, as I stated earlier. This too can be checked, and I recommened you do so rather than believe me or that story.  That incident, as you call it, is already exceeding rare. You have to weigh the pros/cons of that incident (which as I pointed out is not really an incident) with the problems that arise when you make more transparent and governmental control of the Fed. If the Fed has a role in stabilizing the economy (which is it's mandate) and if many of the tools do not work as well with more transparency and if there is evidence across many countries that doing such things to the Fed will likely result in certain problems, then one should make that call. However, to want those changes made while being ignorant of the issues is a terrible idea, and it is the least informed that usually yell the loudest for such changes. This would not be a problem except then certain politicians realize they can get votes by pandering to the ignorant masses, which really leads to tanked economies.  Find how many economies have been tanked by an independent central banks versus how many have been tanked by political forces meddling with their respective economies.  Finally, I highly recommend anytime you read a story that sounds outrageous, track down the source material and read it yourself. If you cannot find source material, or they do not  list it, then distrust them.  You'll find 99/100 times the outrageousness is created by selectively pulling information from the actual reports. Then track down report sources, wherever possible. Etc.  Seriously, read the actual report. It's called carry-trade. They can borrow from governments that have 0% int rates, exchange it for dollars, and then buy u.s. treasuries. Japan would never ever raise their interest rates as their economy runs on keynesian fumes. One important answer is still missing: governments may not be able to do print money because of international agreements. This is in fact a very important reason: it applies to the entire Eurozone.  (I admit that many Eurozone countries also not allowed to borrow as much as they do now, but somehow that's considered a far lesser sin). "Haha now there's two of you.  I have two twits parrot squawking in my ears in stereo.  Okay, so maybe you aren't from the US, in which case I can forgive your confusion and completely circular logic.  You must have gone back to Wikipedia or something, because the IS and LM curves are not, in your words, operating without ""control by powerful offices in government.""  The IS and LM curve indeed cross at a level that is consistent with an equilibrium between income and expenditure's equilibirium with the money market.  But that's just the label slapped on it, it's not determinative as some sort of naturally occurring law of economics in our society.  No, these things don't just happen on their own.  If what you're inartfully implying were true, then there would be no such thing as an expansionary or contractionary monetary policy.  Manipulating and controlling the money supply is the entire reason for the existence of the Federal Reserve!  What is wrong with you?  Go read a book or something on it, fuck me.  The Federal Reserve, by setting interest rates mainly, and by open market operations, and by less frequently changing the reserve requirements which directly controls the MONEY MULTIPLIER (you know, that thing that creates money out of thin air you seem to not be able to understand exists?) is constantly changing AGGREGATE DEMAND in the economy.  Aggregate demand is what the ISLM curve is about.  It's about the equilibrium between price levels and the level of economic OUTPUT DEMANDED.  But not supplied.  That's aggregate supply, and the Federal Reserve effects that less.  But yes, you've simply expanded the scope of things I could talk about that are fucked up about banks and the Fed in particular, because the Federal Reserve, in manipulating aggregate demand for money, actually is destroying money and the efficient use of money at the same time, because the LM curve in particular really represents the relationship between REAL income and the REAL money supply.  Real means not nominal, but in actual purchasing terms.  The Fed is manipulating an LM curve that at its base is a piece of logic built on the assumption that what's going into it are real numbers, and yet by definition, the Fed acting to manipulate it makes those numbers not determined by purely market forces, but also by the Fed.  That makes them less than real.  Basically the Federal Reserve pumps up artificial levels of demand in the economy, which lasts for a bit to generate growth numbers, but in the long term it simply results in inflation and a continually delayed (at least for now) reckoning where the artificial demand (i.e. the government's ability to borrow) cannot be further expanded, and something has to give.  This down the road would be a monetary crisis involving the US dollar being knocked off its perch as the world's primary reserve currency, and the yields on Treasuries skyrocketing to the point that the government is either forced to behave or else print so much money to actually cover interest payments on the debt that the flood of money into the economy causes catastrophic inflation.  But anyway, my point is that you're making a circular argument, because you're saying that the Fed doesn't interfere in or exert tremendous control over the economy, because there's something that we know shows the given price level of money in an economy called the ISLM curve, falsely implying that everything's fine with money because it's determined by mechanical, natural laws, almost like gravity, when in fact the Federal Reserve's whole purpose is to manipulate the inputs that go into that curve.  It reduces interest rates which artificially increases income.  It also increases the velocity of money, an input for the LM curve, by increasing nominal economic output, etc. etc.  The IS and LM curves are not these things that just sort of happen on their own.  This may come as a shock, but the US has a central bank which has as its sole purpose the manipulation of these curves.  Its central mandate is control of price levels.  Its unspoken mandate is to preserve the status of the big banks on the top of society, which is why the big banks created it in the first place, and why they own all the branches (this is the root fact behind why some people say that the Federal Reserve is in fact not federal and is instead privately owned, which isn't completely literally true, but true enough in the sense that it has a clear conflict of interest between the public good it's supposed to be upholding and the private interests of the banks that own its branches and exert control over the financial system, mainly through the New York branch). But that's not the whole story about the total money supply.  There's also the pyramiding effect of the money multiplier.  It's as if you're just pretending these things don't exist.  It's real, I assure you.  Banks create money out of thin air when they extend credit to you.  To pay the obligation to them, you use the real money you in fact earned through your own labor, or from some real asset you might have.  They get the better end of the deal, and almost all the money in the economy is spawned by this process, this insanely exorbitant privilege they have.  And yes, I have a problem with it." "These rates are so low because the cost of money is so low. Specifically, two rates are near zero.  The Federal Reserve discount rate, which is ""the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window."" The effective federal funds rate, which is the rate banks pay when they trade balances with each other through the Federal Reserve. Banks want to profit on the loans they make, like mortgage loans. To do so, they try to maximize the difference between the rates they charge on mortgages and other loans (revenue), and the rates they pay savings account holders, the Federal Reserve or other banks to obtain funds (expenses). This means that the rates they offer to pay are as close to these rates as possible. As the charts shows, both rates have been cut significantly since the start of the recession, either through open market operations (the federal funds rate) or directly (the discount rate). The discount rate is set directly by the regional Federal Reserve banks every 14 days.   In most cases, the federal funds rate is lower than the discount rate, in order to encourage banks to lend money to each other instead of borrowing it from the Fed. In the past, however, there have been rare instances where the federal funds rate has exceeded the discount rate, and it's been cheaper for banks to borrow money directly from the Fed than from each other." "Thanks for the quick reply. I'd like to point out the post that triggered me to make this request in public is -   Reddit post: http://www.reddit.com/r/finance/comments/naboa/fears_persist_that_the_us_labor_market_cannot_be/  Specific response: http://www.reddit.com/r/finance/comments/naboa/fears_persist_that_the_us_labor_market_cannot_be/c37kj2t  The sidebar says that political debate is not permitted in this forum, and until recently I would say this request had been adhered to. But this particular FT article, like others, can be dissected politically, and therefore shouldn't be in r/finance. It belongs in r/economics.   Unfortunately, any posts that relate to current macroeconomic circumstances, especially central banking and global unemployment, will invite the Ron-Paulites and they really don't add any sort of value to r/finance, and they do politicize the forum and debate.   I don't think ZeroHedge _ever_ has a place in this forum. The source is not credible and always has too much of a political angle to be in a forum that has declared itself as ""not a place for politics."""