Negative Interest Rates: How should I prepare?

May 2016

stacking blocks

Why are negative rates now an issue?
Of course, the concern for negative rates did not develop in a vacuum. After all, negative rates are a current reality in several developed economies and many market participants in the US were already forecasting a much less sanguine trajectory for Fed Funds than the Committee publishes in their quarterly staff projections. The market projections, as derived from traded levels on interest rate swaps tied to the effective Fed Funds rate, when contrasted to the Fed’s “dot plot” showed a nearly 2% gap between where the market expected Fed Funds to be at the end of 2018 and the Fed’s median projection. The downside risks to the economy reflected by these market based pricing measures, which by their nature are intrinsically probability-weighted in the process of finding a clearing price, partially obscure more extreme future scenarios.

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