The former vice chairman of the Fed, Stanley Fischer says that negative interest rates are threatening everyone at the Fed.
Speaking at the farewell conference at Jerusalem for Governor Karnit Flug of Bank of Israel, Fischer says that interest rates may affect people if interest rates are raised and then reduced. Fischer says that when interest rates are hiked and then if it is reduced, it will go negative.
The Fed had kept interest rates between zero and 25 for many years before it was raised. The rates have been raised only from 2015.
Fischer had earlier been the Central bank chief of Israel for eight years. In 2013, Flug took over from Stanley Fischer as the central bank chief of Israel.
He has been the vice chairman of the Fed for three-and-a-half years.
Low-interest rates have been hitting the central banks of many countries. For about eight years, the interest rates in the United States have been very low. This is to make the economy recover from the Great Recession strains.
Fischer says that if interest rates are hiked, it may lead to a reduction again. It is this thought that is scaring the Fed now, he adds. If the interest rates are reduced, it may go into negative he adds.
An increase in saving and a reduction in investments have led to a decline in the natural rate of interest. This decline will lead to sluggish growth in the economy, which has to be set right with a sound monetary policy.
The Great Recession has led to an increasing precautionary saving. It has also increased the demand for liquid and safe assets by the people.
However, the low and ultra-low interest rates are just a passing phase and are not here to stay. If the right policies are framed, they can address the root causes of the economy.