A client note from GS on their outlook on the prospect of a negative rate from the Federal Reserve.
- unlikely that negative rates will be implemented in the U.S. any time soon, hurdle remains high
- but the case for them has strengthened
GS says applying the usual model the Fed uses to set rates would call for negative rates and GS is "skeptical that forward guidance and asset purchases can fill the gap, barring a dramatic foray into risky assets for which the Treasury (and ultimately Congress) would need to provide a lot more equity capital"
For the Fed to go to minus rates:
- weak demand driving the recession (rather than the virus)
- fiscal response losing effectiveness
- unemployment rate high
- more QE would be unappealing
