The Federal Reserve has held the Fed Funds target rate constant at zero to 25 basis points today. Chair Jerome Powell indicated that the ongoing COVID-19 public health crisis has weighed heavily on the economic condition of the country. Inflation remains an overriding concern to extraordinarily low interest rates, but is very muted as a result of the economic slowdown and does not present a concern. The Federal Reserve also indicated that it remains prepared to use tremendous tools in the interim as it sees fit in order to maintain liquidity, including using its balance sheet to purchase treasury and agency mortgage-back securities. It is also employing lending powers to an unprecedented extent through a “mainstreet facility” to make credit available where such credit may be necessary to avoid or reduce household suffering (with the understanding that the Federal Reserve has lending powers but may not make grants or extend loans that it does not expect to see repaid).

The Fed’s statement indicates an intention to maintain rates here until it is confident that the economy has weathered COVID-19. The statement does not introduce the possibility of a move into a negative Fed Funds rate as was advocated last week by Narayana Kocherlochota, the former Chair of the Minneapolis Fed. Importantly, the Fed’s statement does not commit to maintaining low interest rates until unemployment returns to 2019 levels.

The Fed refrained from stating that it believes that the economy will recover nicely in 2021 after COVID-19 is behind us. Powell recognizes that there is uncertainty around the virus and that the virus is going to dictate the length and depth of this depression. We will obviously see significant declines in economic activity and significant increases in unemployment in the near term, but POwell and the Fed are unable to provide guidance for the intermediate and longer term.

There is a lot of concern that the Federal Reserve is running out of bullets in its response to the current Depression. It has already lowered the Fed Funds rates to zero, engaged in extraordinary quantitative easing, and opened up the Federal Reserve’s balance sheet in a way that makes the Federal government an active player in US debt markets.

Narayana Kocherlochota, the former Chair of the Minneapolis Fed, makes a compelling argument on Bloomberg.com today for the Federal Reserve and Chairman Jerome Powell to lower the Federal funds rate to negative territory through at least a 25 basis point cut. Kocherlochota argues that the benefits in terms of stimulating bank activity far outweighs the risks in light of the fact that the unemployment in the US continues to spiral out of control.

In a 2015 article on CNBC, Goldman Sachs’ Jan Hatzius recommended that bringing interest rates negative for any length of time must be viewed as a last resort because of the resulting impact on banks’ financials and the dislocation that such a move would cause in the US.

Of course, since the US has not experienced negative interest rates before, it is more of less entirely hypothesizing what the impact on savings and CD rates would be. Today, even with the Fed funds rate sitting at a target of zero to 0.25%, online savings rates are holding firm at or over 1.50%, with one-year online CD rates still higher. (You may be able to find higher local savings rates and local CD rates where you live by checking here or here.)

It would seem that a quarter point move in the Fed Funds rate, bringing it so decisively into negative territory, would cut out any yield in savings and virtually everything in CDs.

This action would put further pressure not just on banks, but on savers who will not be able to maintain purchasing power of safely invested assets against a continued rise in US CPI of around 1%. It would also put still further pressure on local and federal governments who depend on taxation of earned interest.

Am I wrong? Please let me know below what you think happens if the Federal Reserve takes rates negative.

The Federal Reserve made emergency cuts to the Fed Funds rate, taking the benchmark rate to a range of zero to 25 basis points as the COVID-19 crisis hit our shores last month.

While the Fed move will cause savings rates to fall over time, savings rates at many of the leading and most recognized online banks have remained somewhat competitive as these banks have shown some deference to their customers. (They have also in most cases, maintained competitiveness in their CD offerings too).

But, some other banks really took the knife to things. Emigrant Bank, for example, quickly and quietly moved their My Savings Direct account rate to 1%. The Emigrant move was particularly appalling as Emigrant had offered a market leading 2.40% in the Fall in an effort to attract new clients and as Emigrant Bank also raised its Dollar Savings Direct affiliate to 1.50% at the same time as it cut My Savings Direct to 1%. Unfortunately, Emigrant’s games were not surprising to those who are familiar with the bank’s rate practices over the last decade.

Other banks did similar things, and just as quietly, but nothing was quiet as egregious as Emigrant.

Now, banks have the right to set their own rates, and to decide whether they want to be competitive or not at a given point. But, the major online banks – CIT, Synchrony, Marcus, Amex, Ally, Barclays, Citizens Access, Capital One and Discover – have made multiyear commitments to the online banking space in the US, and are extremely unlikely to undermine their competitiveness and their relationship with their customers with quick and powerful rate moves down.

If anything, this period reminds us that sticking with a large recognized name brand is a tried and true strategy in the online banking space.