St. Louis Fed President James Bullard told Yahoo Finance on Monday that negative interest rates are not a clear remedy for the coronavirus-induced economic crisis in the United States, despite market bets on below-zero rates next year.

Bullard said that short-term funding markets in the U.S. operate differently than in Japan and Europe, arguing that implementation of negative rates stateside would be “problematic.”

“I think we can use other tools to handle the situation,” Bullard said.

Bullard pointed to negative interest rate policies deployed by the Bank of Japan and the European Central Bank, adding that “it is not at all clear that they’ve been successful there.”

In March, the Fed slashed interest rates to near-zero and committed to a quantitative easing program that would purchase assets “in the amounts needed.”

In the central bank’s latest policy-setting meeting on April 29, the Fed held rates steady in the target range of between 0% to 0.25%.

But the Fed funds futures market last week priced in bets of the Fed taking rates negative by early 2021. Harvard’s Ken Rogoff published a piece on May 4 advocating for the Fed to lower rates to as low as -3%.

But for his part, Fed Chairman Jerome Powell has been cold to the idea of negative rates, telling Congress last November that taking rates below zero “would certainly not be appropriate.”

‘A habit of caving in the face of market pressure’

Fed watchers are not so convinced that everything is set in stone, though. Capital Economics’s Paul Ashworth wrote May 11 that the Fed has “developed a habit of caving in the face of market pressure in recent years,” adding that while the Fed is unlikely to use negative rates, “we are wary of dismissing the possibility entirely.”

Morgan Stanley wrote May 8 that one obstacle to implementing negative interest rates would be the pending status of the Fed’s internal framework review. The Fed was midway through a monetary policy “review” that allowed stakeholders to offer suggestions on how the central bank could tweak key policy tools like forward guidance or inflation targeting — a review that Rogoff himself participated in.

But Dallas Fed President Robert Kaplan told Yahoo Finance on May 6 that the Fed has “put [the review] off to the side here for the time being,” promising to come back to the review at a later time.

Morgan Stanley wrote that they therefore do not believe that the Fed will conclude its review by the central bank’s next meeting in early June, “reducing the risk that the idea of negative rates as a tool comes up then.”

The Fed’s next policy-setting meeting is scheduled for June 9 and 10.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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