Why can't the Fed lower interest rates below zero?
Because giving someone a loan and paying them to take it isn't a loan anymore.  I'll grant you, some of the treasury bill auctions did slip below 0% -- people paid in slightly more than what the bill would pay out. In as much as this was done by actual investors (and not afore-mentioned helicopter Ben Bernanke keeping the printing presses running hot all night), it was major accounts fearful of the euro disintegrating and banks crashing, and so on, and needing a safe spot to stick their cash for a couple months.  Where the Fed is concerned, that interest rate he's referring to is lending they do to banks. So, how much would you take if you ran a bank and the Fed offered to pay you to take their money? A billion? A trillion? As much as you could cram in your vaults, shove in your pockets, and stuff down your favorite teller's blouse? Yea, me too. "Keep in mind that the Federal Reserve Chairman needs to be very careful with his use of words.  Here's what he said: It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers. So what does that mean? When he says that ""we can't make interest rates lower"", that doesn't mean that it isn't possible. He's saying that our demand for goods is lower than our ability to produce them. Negative interest would actually make that problem worse -- if I know that things will cost less in a month, I'm not going to buy anything. The Fed is incentivizing spending by lowering the cost of capital to zero. By continuing this policy, they are eventually going to bring on inflation, which will reduce the value of the currency -- which gives people and companies that are sitting on money an dis-incentive to continue hoarding it." "If the Federal Reserve were to pay banks to hold money, they would need to get the money from somewhere to do so.  They would have three options: Go to Congress, and request and authorization of funds. As an quasi-independent entity, however, it would be both highly unorthodox for an institution to diminish its own authority by requesting funding, and politically difficult for the Congress to appropriate it. Transfer held-assets  After QE & QE2, the Fed is now the holder of several assets (mortgages and the like) that are already unorthodox for it to hold. It acquired these assets in the first place to soak up excess demand.  If these assets were transferred back to banks, it would have exactly the opposite effect - increasing supply and further suppressing the value of the assets they would be trying to shore up by lowering the interest rate. ""Print money""  The fed could raise the money supply by issuing new bonds. This is inherently inflationary, and while pretty much everyone agrees this isn't bad in the short run, there is already widespread fear that in the long run, QE by itself is going to unleash massive inflation once growth returns anyway.  To keep ""pushing on this string"" would only excerabate these fears, and quite likely turn it into a self-fufilling prophecy. In short, the Fed ""could"" pay banks to hold money, but the political and economic consequences of raising the needed funds to do so would all undermine the institution or the desired effect." Why can't the Fed simply bid more than the bond's maturity value to lower interest rates below zero? The FED could do this but then it would have to buy all the bonds in the market since all other market participants would not be willing to lend money to the government only to receive less money back in the future.  Not everyone has the ability to print unlimited amounts of dollars :)
Let's say today you buy the bond issued by StateX at 18$. Let's say tommorow morning the TV says that StateX is going towards default (if it happens it won't give you back not even the 18$ you invested). You (and others that bought the same bond like you) will get scared and try to sell the bond, but a potential buyer won't buy it for 18$ anymore they will risk maximum couple of bucks, therefor the price of your bond tomorrow is worth 2$ and not 18 anymore. Bond prices (even zero coupon ones) do fluctuate like shares, but with less turbolence (i.e. on the same period of time, ups and downs are smaller in percentage compared to shares) EDIT: Geo asked in the comment below what happens to the bond the FED rises the interest. It' very similar to what I explained above. Let's say today you buy the bond just issued by US treasury at 50$. Today the FED rewards money at 2%, and the bond you bought promised you a reward of 2% per year for 10 years (even if it's zero coupon, it will give you almost the same reward of one with coupons, the only difference is that it will give you all the money back at once, that is when the bond expires). Let's say tommorow morning the TV says that FED decided to rise the interest rates, and now on it lends money rewarding a wonderful 4% to investors. US treasury will also have to issue bonds at 4%. You can obviously keep your bond until expiration (and unless US goes default you will get back all your money until the last cent), but if you decide to sell your bond, you will find out that people won't be willing to pay 50$ anymore because on the market they can now buy the same type of bond (for the same period of time, 10 years) that give them 4% per year and not a poor 2% like yours. So people will be willing to pay maximum 40$ for your bond or less. "This seems like a huge advantage for a Roth to the point where I can't   figure out why anyone would choose a traditional. You are missing something called the time value of money. This is the concept that a certain amount of money now has the same value as a bigger amount of money later. Basically, you wouldn't be willing to give up an amount of money now and get the same amount of money later -- you need to get a larger amount later to be willing to exchange it for a certain amount now. So that larger amount later has the same value to you than that smaller amount now. This is the idea behind interest and investment returns. When you make an investment, and it earns interest or gains over a period of time, in effect that final amount of money (principal + interest) has the same value as the principal when you started, because that final amount was grown from the original principal. So whether you are taxed on the principal in the beginning (as in Roth IRA) or on the principal + interest at the end (as in Traditional IRA), you are still taxed on the same value of money. And if the tax rates are the same between now and in the future, then you pay the same value in taxes in both cases. Roth would only be better than Traditional if the tax rates are lower now than when you take it out; and Traditional would only be better than Roth if the tax rates are higher now than when you take it out. Let's consider a simple example to demonstrate that the two are equivalent if the tax rates (assuming a flat tax, because tax brackets introduce other complications) are the same now and when you take it out. In both cases, you start with $1000 pre-tax wages, you invest it for 10 years in a place with guaranteed 5% returns per year adn then take it out, there are no penalties for withdrawal, and there is a flat 25% tax now and in the future. Note that you are left with the same amount of money in both cases. This arises from the associativity of multiplication. Note that Roth IRA has a higher effective ""limit"" than Traditional IRA, because the nominal limit is the same for both, but Roth is post-tax. So if you contribute to near the limit, where Traditional can no longer match the value that Roth can contribute, then the comparison no longer applies. The $1000 in this example is below the limit for both." My mistake, a *reformed* audit of the fed. Right now the GAO cannot audit transactions of the Fed with foreign central banks or foreign governments, securities credit and market operations, or communication between the Fed and Board of Governors (which you linked to).  The fact that the Fed refuses to tell who receives bailout money and loans at interest rates well below market rates is unacceptable.   This is not a crazy right wing issue, either. Plenty on the left feel the same way, including the (arguably) most liberal American Senator Bernie Sanders who introduced the Senate version to audit the Fed bill a few years back.  The fact is, the Fed deals with MASSIVE amounts of American taxpayer money (and perhaps more importantly, future American taxpayer money), so we have a right to know exactly what is going on in it. It's not the CIA where knowledge of its inner-workings could be a threat to safety, it's a financial institution that deals with monetary and financial policies. "This is the best tl;dr I could make, [original](http://www.financeapprise.com/neel-kashkari-opposed-feds-decision-raising-interest-rates/) reduced by 65%. (I'm a bot) ***** &gt; Minneapolis Federal Reserve Chairman Neel Kashkari voiced opposition to the central bank&amp;#039;s decision to raise interest rates this week due to the latest weaker data on inflation.  &gt; &amp;quot;If we base our inflation prospects on this real data, we should not raise interest rates this week&amp;quot;, said Neel Kashkari, who has voted this year at the Federal Open Market Committee.  &gt; &amp;quot;In the 1970s, this belief led the Fed to keep interest rates too low, resulting in very high inflation. Today, this same belief can cause the Commission to repeatedly predict accelerating inflation, which is why we raise interest rates too fast and we continue to fail to reach our inflation target&amp;quot;, added he.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6i0ks3/neel_kashkari_opposed_feds_decision_on_raising/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~147307 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **inflation**^#1 **interest**^#2 **rates**^#3 **Chairman**^#4 **raise**^#5" Yeah they must just be fanatics. I mean it's not like the Fed actually *targets* inflation, or *tries* to create it, you know as if Bernanke actually mentioned those things in speeches...  Oh, wait... he has.  Damn facts... they get in the way of Keynesian dogma every damned time. "Right... so the fundamental question is if the roll-over cessation will cause short term interest rates to decouple from the Fed's say-so.  This is otherwise known as a bond auction failure.  The fed wants the treasury debt off their books, but they don't want to raise interest rates to make that happen.  So, they're going to experiment with uptake outside of the Fed to see if they can ""boil the frog"".  If the frog starts to squirm, I guarantee you that they're going to take the pot off the burner.  At their the proposed roll-over suspension rate, it'll take approximately 12 to 16 years to to get that two trillion off their books... and that assumes that nothing bad happens during that time.  &gt; Do you know of any good writeups that would back your side?  The closest you're going to find would be anything written about the JCB post 1995... but it looks like their program of direct stock market participation (technically, they're using ETFs, probably for financial cryptography purposes) [began in earnest in 2010](https://www.bloomberg.com/news/articles/2017-07-19/japan-bourse-head-turns-surprise-critic-of-kuroda-etf-purchases)  [this piece ](https://blog.kurtosys.com/central-banks-unthinkable-buying-stocks/) indicates that the Japanese aren't the only ones doing this.  England, The Swiss and even the EU is doing the same thing across multiple exchanges.  As the article points out, there's a two pronged effect of suppressing FX stock price correlations (strengthening or weakening of currencies raising or lowering stocks listed on associated bourses) and reducing volatility through market intervention (AKA plunge protection teams).   They also reference an Investco survey of  central bank reserve managers." Yes, the Fed has made a point of buying up longer-term bonds to push down rates on that part of the curve.  That's not an indication that they're having problems selling Treasuries, in fact far from it.  But apparently there's no demand for Treasuries and Bloomberg is just making up lies to help get Obama reelected?  &gt;Investors are plowing into Treasuries (USB2YBC) at a record pace as the supply of the world’s safest securities dwindles, ensuring yields will stay low regardless of whether the Federal Reserve  undertakes more stimulus to fight unemployment. Buyers bid $3.19 for each dollar of the $538 billion in notes and bonds sold this year, the most since the government began releasing the data in 1992 and on pace to beat the high of $3.04 in 2011. The net amount of Treasuries available will decline by 30 percent once proceeds from maturing securities are reinvested, according to data from CRT Capital Group LLC.  http://www.bloomberg.com/news/2012-04-09/record-treasury-demand-keeps-yields-low-as-supply-shrinks.html Great reply. This is one of reasons why I like this subreddit.  I thought that fed interest are far more important that you state. Rate is low + economy is booming (lender thinks there is good chance of repayment), banks loan money much more willingly (reserves are covered by cheap fed loans -&gt; greater profit). That should significantly affect money supply.