Federal Reserve’s head Jeremy Powell pointed out the baselessness of Trump calls that the United States should get involved into “negative rates battle” with other developed economies, saying that the pace of expansion, unemployment and inflation do not justify such a policy.

At the 90-minute hearing before Congress, Powell emphasized that there is a distance between government tasks and Fed’s problems, saying that the Fed’s job does not include development of trade, immigration and fiscal policies or assisting Democrats in establishing wealth taxes or providing unreasonable credit to maintain expansion, which has already been ongoing 11 years.

However, the head of the Fed paid attention to explaining the rationale of negative rates in Switzerland, Japan and Germany. Trump has repeatedly called on the Fed to reduce the costs of borrowing to the extent that government bonds yield negative return that will allow the government to freely issue more debt. It is well known that if the cost of borrowing in the economy is lower than the rate of GDP growth (and hence the rate of tax growth, that is, state revenue), then the state is relatively “safe debtor” even with unlimited borrowing. For the government, this situation is clearly beneficial on what Trump insists, but he stubbornly does not notice the side effects of negative rates, in particular the adverse impact on the banking sector due to the flattening of the yield curve and disincentive to save in general.

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Yields on 10-Yr Gov. bonds in US and Germany. Notice the convergence starting from the end of 2018 indicating how quickly the outlook for US economy crashed

“Negative interest rates are certainly not in line with current economic conditions,” Powell said in response to a question why European countries could essentially tax bondholders by returning less than the loan amount. “The economy is in a strong position, we have strong consumer sector, inflation. Negative rates tend to exist in large economies during times of weak growth and inflation. This is just not the case with the US”, Powell said.

The Fed continues to expect a moderate expansion of the economy, despite growing market fears of an imminent recession. According to Powell, three rate cuts have not yet fully provided support to the economy, so further cuts should be expected only in the case of a “material” change in economic outlook. Investors expect the interest rate to remain at their current levels at least until the end of next year.

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