WASHINGTON—With negative interest rates in place in several countries, the U.S. Federal reserve has also asked banks to consider what might happen if the same scenario emerged in the United States.
In its annual stress test for 2016, the Fed said it will assess how well big banks are able to respond to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below 0% for a prolonged period.
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the Fed said in its letter.
Under that particular simulation, the unemployment rate would double to 10%, the same level it reached in the aftermath of the last financial crisis.
Three-month bill rates have slipped slightly below 0% several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05% on Oct. 2, noted Bloomberg.
But in the stress test proposed by the Fed, the big banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5% and holding there through the first quarter of 2019.
The Fed stressed that “this scenario does not represent a forecast of the Federal Reserve.” It further assumes "that the adjustment to negative short-term rates proceeds with no additional financial market disruptions."