Market mayhem: Central banks may be fueling the fire

What the heck is a 'negative' interest rate?

Stock markets around the world are in turmoil.

Crashing oil prices and weak economic growth are the main drivers of the market mayhem.

But some experts argue that global central banks are adding fuel to the fire, amplifying the gloomy outlook and spooking investors with unorthodox policies like negative interest rates.

Late last month Japan joined a growing list of central banks putting interest rates in negative territory in an effort to boost growth. Even the Federal Reserve has signaled negative rates could happen in the U.S., if needed.

“Financial markets increasingly view these experimental moves as desperate and consequently damaging to financial and economic stability,” Scott Mather, chief investment officer at PIMCO, wrote in a new report.

Related: 4 takeaways from Janet Yellen’s testimony

Some in Congress believe the Fed has no tools left, leaving its next move up in the air.

“The Fed is probably out of ammunition,” Republican Senator Bob Corker told Federal Reserve Chair Janet Yellen Thursday.

Then he asked the million dollar question: “Are you considering negative rates…yes or no?”

Yellen replied the Fed would “take a look” at negative interest rates as a possible option.

Related: What are negative interest rates

Talk of negative rates in America isn’t good for markets, experts say. After all, it was only in December that the Fed projected it would RAISE rates four times in 2016.

“The fact that there’s even an explicit discussion in Washington about negative rates is very troubling,” says Tony Roth, chief investment officer at Wilmington Trust.

Roth argues that Yellen and other Fed leaders are adding to the volatility because they’re talking too much during uncertain times. Remember, it wasn’t until the financial crisis that the Fed held press conferences four times a year. Before that, Fed officials were mostly silent.

Yellen and the Fed also preach a policy called “data dependent,” meaning they base their strategy on the flow of incoming economic data. That often leaves markets trying to interpret what every piece of data means to the Fed’s next move.

“The markets are trying to read tea leaves…when the Fed rightly so has no idea what it’s next move is,” says Roth. “That’s fueling the volatility in the markets.”

Related: Stocks rebound from painful week

What’s worse is the supposed positive impact of negative rates — increased lending and investment — aren’t showing up yet. Negative rates are supposed to be an incentive for businesses to spend, but some European businesses aren’t biting yet.

“Negative rates in Europe also appear to have had little impact on inflation or investment,” says Marc Chandler, global currency strategist at Brown Brothers Harriman.

Investors don’t appear encouraged by the fact central banks seem to have run out of plays to call. The need for unorthodox moves only highlight the gloomy economic backdrop.

That’s why cash is flying into gold, which tends to rise during times of fear. Gold prices have spiked 18% just since mid-January, including a big rally on Thursday during Yellen’s testimony in Congress.

“This only happens when investors think central banks have lost their way,” says Nicholas Colas, chief market strategist at Convergex, a brokerage firm in New York. “The notable rally in gold is essentially a protest vote against the global financial system.”

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