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San Francisco Fed paper: Negative interest rates a key tool against downturns

Negative interest rates may become an important monetary policy response to future economic downturns and they could have helped in the U.S. economy's recovery from the financial crisis, according to a report published by the Federal Reserve Bank of San Francisco.

The San Francisco Fed analyzed the financial market reaction to negative interest rates in economies where such policy tools were adopted by central banks, including the European Central Bank and the Bank of Japan.

The analysis showed government bond yields of all maturities "tend to exhibit both an immediate and a persistent negative response" to the introduction of negative rates, according to Jens Christensen, an economic research adviser at the San Francisco Fed.

"Negative interest rates therefore appear to be a powerful monetary policy tool that could help ease financial conditions when interest rates would otherwise be stuck at zero as the perceived lower bound," Christensen wrote.

Christensen said the U.S. economy's recovery after the financial crisis was "constrained" by interest rates being stuck at zero as the perceived lower bound.

"Mildly negative" rates in the U.S. from 2009 to 2011 could have helped stimulate faster growth and boosted inflation, Christensen added.

In September, Fed Chairman Jerome Powell played down the possibility of implementing negative interest rates, saying the central bank evaluated the policy tool during the financial crisis but opted against it.

Powell said he does not expect the Fed to cut rates to near-zero levels again, but that if it did, the central bank would look at using unconventional policy tools such as forward guidance and asset purchases rather than resort to negative rates.