Is it possible to have negative US rates ?

THE current state of the United States economy is not calling for negative rates yet but is there a sign of concern that President Donald Trump keeps asking for them?

Is the US economy really in such a “good place” as believed by some including top Federal Reserve officials?

A good economy is still being touted by Trump who in asking for negative rates, referred to potential further stock market gains and competitiveness in the global market.

But the Cass Freight shipments Index, a leading indicator of economic health, for October has declined minus 5.9%, following a series of contractions from May through September.

Demand is weaker across almost all modes of transportation, not just domestically but also internationally, with several key modes suffering “material increases in the rates of decline, signaling that the contraction is getting worse,” said the Cass freight report for October.

The movement of tangible goods is the heartbeat of the economy, and the report notes that following a lag period between the prediction and the outcome, there is a growing risk that US gross domestic product growth may go negative by year end.

As the index, on a two-year percentage change basis, went negative to minus 0.1%, the great surge of 2018 or the “Trump bump” has disappeared from a freight flow perspective.

The highly stimulative effect of the corporate tax cut has been “completely abolished by the prosperity destroying effect of the tariffs and ongoing trade dispute,” said the report.

With the dry van trucking volume being a fairly reliable predictor of retail sales, current demand (as tracked by the real time DAT Dry Van Barometer) falling below capacity indicates that the consumer economy is less healthy than is widely thought.

Retail sales are poised to disappoint, said the report, even as this is a season which should see stronger volumes.

Within the US steel industry, once thought to be immune to the trade fight, metal volumes shipped by rail are down minus 3.6% year to date.

In terms of trading partners, weakness in Asian airfreight volumes suggests that the region could be entering a recession, said the report, highlighting that possibility in China, South Korea and Singapore.

Despite the pushback on the idea of negative US rates by the Fed and Wall Street, could conditions prompt the Fed to eventually send rates into negative territory?

A recent Bloomberg survey indicates that the benchmark Fed funds rate could go as low as zero, which had prevailed in the aftermath of the financial crisis from late 2008 through 2015, noted Maybank Investment Bank group chief economist Suhaimi Illias.

Negative rates may be used to deal with a technical recession, which is two consecutive quarters of negative growth, as it becomes cheaper to borrow, and consumers spend rather than pay a fee on their deposits.

With negative rates, the US economy would be in active competition with those already in negative rate territory, such as Japan, Sweden, Denmark, Switzerland and the European Central Bank, said Ambank Research head Dr Anthony Dass.

If it is not to deal with the coming recession, negative rates may be a reality in the following one.

Pension funds and insurance companies looking for returns will be in a quandary, and end up owning assets they would rather not have.

Japan’s Government Pension Investment Fund, the largest of its kind in the world, has backed off from non-profitable domestic bonds, while others are investing in real estate and corporate debt.

Failure of insurance companies, and at some point, pension funds, could become a real possibility.

Negative rates would be the cause of yawning income disparity as those who remain credit worthy could get hold of extremely cheap borrowings while the poor languish in financial purgatory, said Interpacific Securities head of research Pong Teng Siew.

The Fed may be forced to use negative rates if the reintroduction of its massive bond-buying stimulus under quantitative easing (QE), does not work.

The Fed recently restarted its bond buying programme which it said was not QE, on a modest scale, following sharp increases in interest rates in overnight markets.

Indications are that it will likely respond to the looming global downturn, which could lead to a recession, by pumping in unlimited amounts of money into markets.

But the impact of this future QE may diminish if it is reintroduced, said RHB Research Institute chief Asean economist Peck Boon Soon.

Consistent declines and volatility in economies and markets often point to more trouble ahead and even negative rates may not induce people to borrow or spend.

Columnist Yap Leng Kuen notes that despite ongoing talks, the Us-china trade war may have gone “to the point of no return.”