ALBERT EDWARDS WARNS: The next US recession will surprise investors, and a desperate Fed's next move will be unprecedented
Societe Generale's Albert Edwards believes that the Federal Reserve should lower its benchmark rate below zero during the next economic downturn.
Negative rates are a last-resort monetary policy tool that central banks use to crush deflation and encourage consumer spending.
In a note to clients on Thursday, Edwards wrote (emphasis added),
"The next US recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed. Bob [Janjuah of Nomura] and I thought that this time we would see deeply negative interest rates in the US (and Europe). Sweden has led the way, dipping their toe below the water line with their current -0.35% policy rates but there will be more, much more along these lines. For if -0.35% is possible, why not - 3.5% or less? It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the US. The last seven years of exploding central bank balance sheets will seem like Bundesbank monetary austerity compared to what is to come."
QE, or quantitative easing, was the name of the Fed's program involving the purchases of billions of dollars worth of bonds.
Before the Fed meeting, Edwards wrote that an economic bubble fueled by low borrowing costs was worse than the risks of the current low-rate environment, and he called on the Fed to raise rates.
So this does not seem like a call for negative rates now, but instead, that it's a tool the Federal Reserve would use when next it has to tighten monetary policy.
During last week's press conference, Fed chair Janet Yellen said the FOMC did not have a serious discussion about negative rates.
We recently highlighted that the most outlandish outcome of last week's Fed meeting was two dots on the Fed's "dot plot."
The graphic plots FOMC members' expectations for end-of-year interest rates from 2015 through 2018 and in the longer run.
It showed that one member thought negative rates were appropriate at the end of this year and 2016. Economists speculated that the member was Minneapolis Fed president Narayana Kocherlakota, who's opined for ultra-low interest rates very publicly.
