JPMorgan Says Benefit of Negative U.S. Rate Might Outweigh Costs

A negative Federal Reserve policy rate is still improbable, but if it were to happen it could be a net benefit, according toJPMorgan Chase & Co.

“Mildly negative rates such as -10 basis points for a year or two could be beneficial in the current conjuncture,” strategists led by Nikolaos Panigirtzoglou wrote in a note Tuesday. However, he added that “we still view a negative Fed policy rate as unlikely,” and emphasized that rates would need to be just slightly negative, and not for too long, in order to be effective.

The issue of a negative Fed policy rate has arisen in recent days because futures are currentlypricing one in, though officials at the bank havelargely dismissed the idea up to now.

In arriving at its conclusion, JPMorgan cited results from the European Central Bank’s cut to a rate of negative 10 basis points in June 2014.

There was a significant increase in the pace of Euro area credit creation in the aftermath of that move, Panigirtzoglou wrote. Easing in funding conditions and reduced fragmentation outweighed the negatives from a shrinkage of the euro money-fund industry and a reduction in interbank market activity. He sees a similar potential outcome for the U.S.

The report said another positive effect from a slightly negative rate might be that a search for yield could spread from money markets to bonds, with high-quality corporate and mortgage bonds the biggest beneficiaries. It could also mean less healthy-banks see significant easing in their funding conditions, the report said.

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