One reason the US Federal Reserve shuns NIRP is because it threatens to destabilize the $2 trillion money market industry, but it is not the only reason.
A paper last month for the San Francisco Fed issued a withering verdict on Europe’s experiment. “Both bank profitability and bank lending activity erode more the longer such negative policy rates continue,” it said.
Its review of 5,300 banks found that there may be an initial bounce but then “lending declines over the next two years, more than reversing any initial gains. As negative rates persist, they drag on bank profitability even more,” it said.
It is Europe that has drunk deepest from the intoxicating waters of the Pierian Spring, going all the way to minus 0.5pc in a belated attempt to fight deflation, a pathology caused by its own policy errors years ago.
It has done this even though the European Central Bank itself published a paper in 2018 concluding that NIRP tightens economic conditions, is a “negative shock to the net worth of banks”, and “could pose a risk to financial stability”.
It found that banks dared not pass on negative rates to their savers from fear of deposit withdrawals. Those lenders that depend heavily on stable savings deposits – as opposed to more fickle capital markets – tried to compensate for the hit to profit margins by doing two things: they cut lending; and they dabbled in gambling on high-risk markets. In short, they made the whole system more dangerous and dysfunctional.