Abstract

For nearly a decade, global central banks have battled a “new normal” of low inflation and low growth. To combat these dynamics, some central banks—the Bank of Japan, the Swiss National Bank, and the European Central Bank, among others—have pursued a policy of dropping their target interest rates below the zero lower bound. Conspicuously absent from this group is the Federal Reserve, despite facing similar economic headwinds that suggest that negative interest rates could be more effective than other policies the Fed has pursued. In this paper, we provide the not merely the economic case for negative interest rates (although we summarize the evidence and theory), but discuss the main barriers that face the Fed in adopting this policy: law, politics, and institutions. We discuss the technical landscape that the Fed will encounter, and discuss the path the Fed can pursue well short of seeking legislative amendment to the Federal Reserve Act.