Fed officials says no negative rates; gold prices would benefit if they change their minds
(Kitco News) - Market participants are having a hard time forgetting about negative interest rates in the U.S., even though Federal Reserve officials keep saying they won’t happen. However, analysts said that if rates end up going negative after all, that would be a boon to gold.
The Federal Reserve has slashed its main interest rate to near zero and launched massive quantitative easing and other measures to prop up the economy and markets during the global COVID-19 pandemic. At the same time, the government has launched aggressive stimulus efforts. These steps have already lifted gold since mid-March.
However, the one tool Fed policymakers have said they are not considering is negative interest rates. Several Fed speakers have opposed the concept, and Fed Chairman Jerome Powell reiterated that view on Wednesday.
“This is not something that we are looking at,” he said during an event hosted by the Peterson Institute for International Economics.
Still, the idea hasn’t died. Short-term rates of U.S interest-rate futures are continuing to factor in negative rates for contracts maturing early in 2021. The Bank of Japan and European Central Bank have implemented negative-rate policies due to sluggish economies since the financial crisis a dozen years ago. For the first time ever, the Fed funds futures last week also began reflecting a small chance of negative-rate policy in the U.S.
“Powell had no more luck than his colleagues in removing the risk that the Federal Reserve will adopt a negative-interest-rate target,” said an early-morning research note from Bannockburn global Forex. “The implied yield of April 2021 through March 2022 Fed funds futures contracts remains negative.”
Analysts at Brown Brothers Harriman said, “We suspect the negative rates issue will continue to come up and we expect the Fed to keep pushing back against the notion.”
For one thing, Commerzbank precious-metals analyst Carsten Fritsch pointed out, U.S. President Donald Trump is continuing to exert pressure in favor of negative rates.
“This is an issue that is therefore likely to preoccupy the markets for some time yet, which should benefit gold,” Fritsch said.
Analysts at the consultancy Metals Focus said that just because the futures market is implying negative rates does not mean that the Fed will do so. Nevertheless, the expectations themselves can impact financial markets and assets such as gold.
“If more meaningful signs emerge that the pandemic is being brought under control, global economic activity and financial markets could start to see a stronger bounce, which in turn could swiftly reduce the implied probability that rates will turn negative,” Metals Focus said.
“That said, in the unlikely event that the Fed takes policy rates below zero next year, the dollar will weaken significantly, pushed by the unfavorable move in interest-rate differentials. This will act as a strong tailwind for gold. In addition, with negative rates, the opportunity cost of holding gold will diminish further, making it even more attractive to both retail and institutional investors.”
The so-called “opportunity cost” refers to any interest income lost to investors if they opt to hold a non-yielding asset such as gold instead. This “cost” essentially dries up or goes away when rates are at zero.