Monetary Policy Off the Rails

September 7th, 2016 by

We live in unprecedented times when it comes to central banks resorting to untested and counterintuitive monetary policy.

As many experts have noted over the past two years, the Federal Reserve and other central banks around the world are in dire need of a credible exit strategy from their extreme policy measures. Increasingly, it looks like years of ultra-low interest rates and central bank asset purchases will be difficult to unwind.

Upside Down



One of the most startling examples of how far out monetary policy has gotten—and not “far out” in the 1970s sense of “awesome”—is the use of negative interest rates. Although real rates at times turn negative, nominal interest rates have never been pushed below the zero bound before. In its most basic incarnation, a negative interest rate charges savers to park their money in the bank. To many, this idea seems flatly absurd. Similarly, with subzero interest rates, many government bonds are offering yields below zero. Again, this means you’re actually paying the government to hold your money!

One of the more bizarre consequences of this situation has been the way banks are treating their cash reserves. Storage of paper money like euros has taken on greater importance than normal, prompting some banks to even take out insurance policies on their piles of money. For example, Swiss banks have resorted to insuring piles of millions of francs considering that the Swiss National Bank (SNB) is currently sporting a -0.75% benchmark rate. Rather than paying the central bank 7,500 francs to hold onto 1 million francs, for instance, some banks would rather stash that million francs in a shoe box and insure it for 1,000 francs (about $1,030).

Cash hoarding will continue to be a problem so long as negative interest-rate policies (NIRP) remain in place.

The Monetary Policy Catch-22

From a broader perspective, the Fed and its peers are caught in a classic “catch-22” of being damned if they do and damned if they don’t: more economic stimulus digs the hole deeper, yet normalizing monetary policy risks crashing the economy.

This apparent no-win situation has reignited calls for “helicopter money” that were first made famous by former Federal Reserve Chair Ben Bernanke. The idea would be to directly inject cash right into the economy—hence the image of helicopters raining down money to consumers. There are some economists (including Bernanke) who still believe that helicopter money measures could help spur inflation; however, the quantitative easing (QE) and other stimulus measures that central banks have engaged in were intended to do exactly this and have not yet produced the intended results. MarketWatch calls it the “brave new world of central bank intervention.”

QE money cannonAnother worrisome sign is the growth of the U.S. budget deficit. After the deficit was slashed by more than one-half during the first five years of the Obama administration, the Congressional Budget Office (CBO) now estimates that the gap will jump almost 35% to $590 billion at the end of the fiscal year.

Given the partisan gridlock in Congress and the politicization of government spending, it’s unlikely that central bankers will receive any support for their extreme measures from equally accommodative fiscal policy. The train is truly careening off the tracks at this point.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

3 thoughts on “Monetary Policy Off the Rails

  1. walter libby

    What we are witnessing is the death of ideologies–on the fiscal side Keynes was called back into the game to fix things while central banks implemented unconventional monetary policies, yet the global economy suffers from a lack of demand… its life-blood. As a consequence the political order is breaking down… both domestically and globally. Given that, it’s time to look at our options… even those that may seem to be overreaching. Because what we are lacking is a serious discussion about our very survival. It’s like when all else fails, read the instructions: we’re born free. But freedom here isn’t so much an individual thing, but a collective will. But for that to come into play, the individual must be informed and offered a plan of action: a new ideology based on practical reason–simply doing what needs to be done. So, for your perusal: Plan B @

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