Donald Trump wants negative interest rates. It's a bad idea.

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President Donald Trump now wants the Federal Reserve to reduce interest rates to zero or less. But it should take into account the disadvantages of negative rates, which have not boosted strong growth in Europe and Japan and could provoke a firestorm among US savers.

Stock market investors, meanwhile, should note that this month's recovery came as bond yields have reversed some of their recent sharp declines.

In his latest attack on the central bank, Trump tweeted on Wednesday"The Federal Reserve should lower our interest rates to zero or less and we should start refinancing our debt. THE COST OF INTERESTS COULD BE REDUCED, while lengthening the term considerably. The president concluded by calling on the Fed not to follow other central banks at negative rates.

This is the point of view of the king of self-proclaimed debt. "As a highly indebted real estate developer, Trump is thinking about negative rates from a borrower's perspective," writes Paul Ashworth, chief US economist at Capital Economics.

But the Fed has shown lukewarm about such a possibility, "in part because officials know that this could provoke outrage among savers and drag the central bank into a political whirlwind ", he adds. Money market funds could also experience massive outflows, which could disrupt short-term financing for businesses, banks and perhaps the Treasury.

In addition, negative interest rates in the eurozone, Sweden, Denmark, Switzerland and Japan have been mixed, says Ashworth. While bond yields fell below zero, banks were reluctant to impose negative rates on depositors, which limited their profits.

Trump believes that the United States deserves to have interest rates below zero because they have "an excellent currency, power and balance sheet". In fact, negative interest rates reflect the economic sluggishness of Europe and Japan. In contrast, US interest rates peaked in real terms (ie, adjusted for inflation) when they were "Morning in America" ​​in the mid-1980s.

Long-term Treasury bonds briefly rose to 14% in May 1984, 10 percentage points higher than inflation. At present, the real yields of Treasury securities protected against inflation are just above zero. The 10-year TIPS is 0.14%, while the 30-year TIPS is 0.56%. After taxes, which are levied annually on the adjustment for inflation, these yields are already below zero.

Unlike last year, the attack on Trump's Fed no longer seems justified. Last October, while the central bank was raising its key rate and reducing its balance sheet, while the stock market was heading towards a correction, I wrote that the president was right to blame the bank central to be too restrictive.

Now, the Fed is on the cusp of reducing its target federal funds rate from the current range of 2% to 2.25% at the Federal Open Market Committee meeting next week. The futures market of federal funds provides a probability of 88.8% of a reduction of 25 basis points, a quarter of a percentage, as well as a probability of 72.3% of a additional reduction of 25 basis points or more at its December meeting. The Fed has also stopped the narrowing of its balance sheet.

Meanwhile, the stock market has been rising, with the
S & P 500
He resumed the 3000 level on Wednesday for the first time since July 30th. This leaves the benchmark at only 0.82% of its record and up 2.54% since the beginning of the month. the
Dow Jones Industrial Average
was only 0.81% of his absolute record,

The September rally was also marked by an even more remarkable rotation of the previous winners of the market, including defensive stocks with slow growth and dividends, shares of reduced value.

While bond yields have drifted off their lows in recent days, 10-year Treasuries are trading at 1.749% on Wednesday, up from 1.461% on September 3rd, coinciding with the September stock market rally. led by the industrialists. and financial. A more inclined yield curve is also a positive economic sign.

Pay attention to what you want when you ask for zero or negative interest rates, Mr. Speaker.

Write to Randall W. Forsyth at [email protected]