The US dollar yesterday climbed toward a three-week high as risk appetite deteriorated broadly after US Federal Reserve Chairman Jerome Powell dismissed speculation about negative interest rates.
Although Powell is the latest in a parade of policymakers to brush off the notion that they might push rates into negative territory, futures tied to Fed interest rate policy expectations were pricing a small chance of sub-zero US rates by March next year.
While the Fed chairman also urged more fiscal stimulus to support the economy, UBS Global Wealth Management chief investment officer Mark Haefele said that ongoing political tensions suggest additional stimulus is “unlikely to immediately materialize.”
Powell’s comments on Wednesday sent investors scurrying to the relative safe-haven appeal of the greenback while US stocks posted their biggest two-day fall in more than three weeks.
Against a basket of its rivals, the US dollar edged 0.15 percent higher at 100.30 points, hovering below a three-week high of 100.44 tested earlier this week.
“The committee’s view on negative rates really has not changed. This is not something that we are looking at,” Powell said in answer to a question at an event hosted by the Peterson Institute for International Economics, referencing the Fed’s policysetting Federal Open Market Committee.
A number of major central banks — including the Bank of Japan and the European Central Bank — have implemented negative-rate policies in the years since the 2007-2009 financial crisis because their sluggish economies have failed to produce the desired level of inflation.
Last week for the first time ever, Fed funds futures began reflecting a small chance that negative rate policy would find its way to US shores. The futures market is used to hedge for and bet outright on the level of the Fed’s benchmark overnight interest rate as far as three years down the road.
The effectiveness of negative rate policy remains the subject of debate in global central banking circles. The idea has at least one high-profile fan, US President Donald Trump, who tweeted favorably about negative rates again this week.
Trump has frequently called negative rates a way to limit the US dollar’s strength and keep exports competitive.
Powell is only the latest in a string of US policymakers to rebuff the idea that a sub-zero policy is on the table.
At least six of the 12 presidents of the Fed’s regional banks have shot the idea down, and Powell said at Wednesday’s event that disregard for it has been the subject of rare unanimity among policymakers.
The Fed’s top official said policymakers prefer alternatives such as forward guidance — or hard signals of how long current policy will remain in place — and large-scale asset purchases, also known as quantitative easing.
“We’ve said that we continue to rely on those tools that are tried and they are now a part of our toolkit,” he said.
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