Federal Reserve Chairwoman Janet Yellen voiced uncertainty about future interest rate hikes citing legal issues that required additional clarity before calling for rate changes.
At a meeting with lawmakers Wednesday, Yellen added that she didn’t think any serious roadblocks exist that would prevent the Fed from sticking to its plan to introduce several small rate hikes in the coming year. However, she did point to tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth as risks to the U.S. economy that could endanger Fed plans.
"I don't expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates," Yellen said. "There is always a risk of a recession...and global financial developments could produce a slowing in the economy."
However, according to former chairman Ben Bernanke, the Federal Reserve should consider using negative rates to counter the next serious downturn. “I think negative rates are something the Fed will and probably should consider if the situation arises,” he said.
Incentive to Growth Spur
One reason to push rates into negative territory which would force banks to pay to park a portion of their reserves at the central bank would be to give these banks an incentive to instead lend the funds, thus spurring economic growth.
When the economic recovery was proving unsuccessful in 2010, the Fed considered adopting negative rates but decided against it voicing concern about what negative rates would do to money-markets funds.
Since then, however , with the global economy weakening, many central banks, including the European Central Bank, have decided to charge banks for parking reserves with the Bank of Japan adopting negative rates just last month.