Generally speaking, interest rates on bonds are fixed.
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Janet Yellen, Chair of the Federal Reserve, added to the confusion Thursday as she testified to the Senate Banking, Housing and Urban Affairs Committee. “In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation”.
Investors have grown deeply skeptical that the Fed, which raised interest rates in December for the first time in almost a decade and issued economic projections suggesting another four hikes in 2016, will be able to continue tightening monetary policy in the face of global warning bells that have grown louder since the beginning of the year.
“There is always a risk of a recession…and global financial developments could produce a slowing in the economy”.
US markets closed well in the red after stocks received a savaging from oil prices dipping to their lowest level since 2003.
KEEPING SCORE: The Dow Jones industrial average fell 173 points, or 1.1 percent, to 15,741 as of 10:02 a.m. Eastern Time. Yellen said Thursday that negative rates might be legal, but the question remained open to further examination. Although China’s economic slowdown does not appear to be sharp, she expressed concern about the uncertainty of China’s exchange rate policy that she said led to market volatility and exacerbated concerns about the outlook for global growth.
“The local market took this as a positive indicator as the Fed would take further consideration before raising rates again when it meets in March”, said Regina Capital managing director Luis Gerardo Limlingan.
“(Central banks) have done all they can do and these policies may not improve economic growth or may not support financial markets”, he said.
The benchmark yield has dropped more than 60 basis points since the start of the year as investors fled stocks and turned to assets that tend to preserve capital but offer a yield.
But Yellen said that the Fed is not planning a similar move even though U.S. inflation remains weak and far below its 2.0 per cent target. But that turned around when Yellen reiterated her view that a cut, while it can not be ruled out, is “not the most likely scenario”. That was enough to push the unemployment rate down to 4.9 percent.
“I don’t know that there’s anything reassuring coming out of her testimony”, he said.
Despite so much talk about rising interest rates, a whole new idea is making its way around Washington D.C. that would reverse the projected course of the Federal Reserve.
Yellen tried to keep all options on the table while waiting for more data about the recent market anxiety’s effects on the USA economy.
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She said regulators are in the process of evaluating the “living wills” submitted previous year by big financial firms to describe how they would cope with a financial crisis without endangering the entire U.S. financial systems or requiring a government bailout.
