Negative? Nah, nah, Janet!

The topic of negative interest rate is back again. The equity markets are getting pounded all across the globe. And the primary reason for this is: Panic! There is enormous investor panic out there about the ability of the global central banks to steer the world economy; about China; about oil; and about nations that rely primarily on commodity exports; and about banks that might have high exposure to some of the bad debts associated with all of the above.

And what is the one thing that central bankers should avoid doing during this climate? - Causing further panic! But that is exactly what some members of the Federal Reserve have been doing recently. They are succumbing to this investor panic and panicking themselves in some respect. They are worried if they will be blamed if something goes awry. But I also have to give them some leeway as markets, some economists and experts have been pulling them in all directions to do this, do that, say this, say that. And in that course, the words “negative interest rates” have been pulled out, rather forcefully, from the mouths of some members of the Federal Reserve, including its chairwoman Janet Yellen.

In my opinion, a negative interest rate, or a talk of it, will send the financial markets into a dizzy spin of chaos and panic, if not already - because a negative interest rate will seal the final nail in the credibility-coffin of the Federal Reserve and its ability to steer the US economy without causing another massive recession. Instead, I would suggest that the Fed keep its tongue steady and assure markets that they are in control; and that they would be flexible with regards to the timing of any further interest rate hike. Now, I have to admit that they have been saying that they are flexible, that they are data driven and have tried to assure that the US economy is in solid footing. But my problem is that in the same breath, they also talk of things like negative interest rates – which unnerves global investors – because this tells those investors that there could be something that they don’t know or don’t see that could be lurking behind the shadows of the global economy. And this has caused a flight to safety with all global equity indexes plunging into bear market territory in recent weeks. Ironically, in today’s sentiment driven financial markets, if the Fed panics about the state of the global economy, they will ultimately be blamed as I fear that their panic would be the trigger for the real panic in the real economy.

Bottom line: The Fed should weed out the noise from the panicking equity markets and communicate with a steady tongue.

In the next post, I will discuss about China, oil and their relationship to the current global panic in equity markets.