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The Federal Reserve may need to act further to pull the US economy out of its slump, but negative interest rates are still out of the question, Chairman Jerome Powell said Wednesday.
Potential for the unconventional policy tool resurfaced on Tuesday after President Donald Trump praised the "gift" and called on the US to adopt such rates. Even as the current downturn grows "significantly worse than any recession since World War II," the central bank hasn't changed its stance on pushing its interest rate lower, Powell said.
"The committee's view on negative rates has not changed. This is not something we're looking at," he said in a videoconference with the Peterson Institute for International Economics.
While Powell stopped at detailing what additional actions the Fed may take, he noted the US economic rebound will likely be more chaotic than first expected. The nation's path forward remains "highly uncertain and subject to significant downside risks," the chair warned in his prepared remarks.
"There is a sense that the recovery may come more slowly than we would like, but it will come. And that may mean that it's necessary for us to do more," Powell added in a question-and-answer portion.
Powell's bleak tone immediately shook US markets. Equities erased early gains and opened lower on Wednesday as the Fed chief detailed his view of the current economic backdrop.
The Fed's refusal to drag rates below zero could be a blessing in disguise for long-term investors, Seema Shah, chief strategist at Principal Global Investors, said. Any short-term benefits such policy would bring the US would likely give way to long-term market dislocation, she added.
"What's more, experience outside the United States suggests that slashing rates has distorted financial markets, crippled bank lending and threatened pensions systems worldwide," Shah said. "Indeed, central banks have been reconsidering the wisdom of negative policy rates, with the Swedish Riksbank exiting negative rates altogether."
The central bank is more likely to boost its asset purchases and lending programs before considering negative rates, the strategist noted. The Fed began its corporate-bond ETF purchases on Tuesday, opening the first of its credit facilities for companies struggling through the virus-induced collapse.
The Fed's interest rate sits at a range of 0% to 0.25%, a historic floor last implemented during the 2008 financial crisis.
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