At the long end, the clear choice seems to be a ten-year rate, which is the longest maturity available in most countries on a consistent basis over a long sample period. At the short end, there is a wider variety of choices. An overnight rate, such as the fed funds rate, is close to the extreme of the maturity spectrum.
Fed officials were reluctant to follow the lead of countries like Japan and Switzerland, which implemented negative rates—effectively taxes on bank deposits during the last downturn. The reasons were varied, but centered around potential trouble for money market funds, which are more predominant in the US financial system and could find it hard to break even if rates went negative.
But a recent San Francisco Fed Letter suggests some US central bankers are warming to the idea.
It finds negative rates could have made the Great Recession of 2007-2009 less shallow and less lengthy, potentially saving millions of jobs in the process. The downturn wiped out nearly 9 million jobs that took several years and substantial monetary and fiscal stimulus to get back.
'Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential,' writes Vasco Curdia, a research advisor at the San Francisco Fed's Economic Research department.
'It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.'