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If the Fed takes interest rates negative, it will do so in spectacular fashion and avoid 'dipping a policy rate toe' below zero, Standard Chartered said

Standard Chartered said if the Fed were to introduce negative interest rates, it would have to be at least -0.5% or -1%, in what the bank called a "Hail Mary" move.

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  • "No one likes trying a 'Hail Mary' from midfield as the clock ticks down when you are losing, but you kick the ball a long way in that situation," Standard Chartered analysts said in a note.
  • The Fed has yet to use negative rates, but Standard Chartered said it might experiment with them if the US economy doesn't recover quickly from the pandemic.
  • It said reducing the Fed Fund rates below zero could also reduce a global dollar shortage and increase gold demand.
  • Goldman Sachs said last week that the case for negative rates in the US has increased.
  • Visit Business Insider's homepage for more stories .

If the Federal Reserve opts to take its main interest rate negative during the coming months, it will only do so with a "Hail Mary" cut to between -0.5% and -1%, according to analysts at Standard Chartered.

If it doesn't go big, it won't go negative at all, the analysts said.

In a note this week, the British bank said:"If the Fed takes the fed funds rate negative, it will likely take it 50-100bps negative. In our view, this is a much bigger risk than the Fed dipping a policy rate toe into negative waters."

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"No one likes trying a 'Hail Mary' from midfield as the clock ticks down when you are losing, but you kick the ball a long way in that situation there is no point to a short pass," Standard Chartered added.

The bank is not modelling its baseline scenario on negative rates, but forecasts a number of consequences such a move could have.

Fed chairman Jerome Powell so far has turned a blind eye to negative rates, but analysts have noted that what the Fed does will ultimately depend on the type of recovery the US has from its current economic crisis. If the economy springs back quickly, negative rates are unlikely, but if there is longer turmoil, they become more possible.

Indeed, Goldman Sachs noted last week the argument for negative rates in the US has strengthened amid fears that the recession driven by the coronavirus will be deep and prolonged.

The Fed's key rate currently sits at 0.25%, with the central bank announcing its next move on June 10.

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Negative rates in the US could help alleviate a global dollar shortage, Standard Chartered added.

"As an aside, generating USD weakness could be the main motivation for negative rates, if there were no other way to relieve the global US dollar shortage."

"The case for USD weakness on negative rates is straightforward, in our view. We think that US rates would quickly approach and possibly even fall below those of the euro area."

Cutting the fed funds target to 0.5-1% below zero would be positive for US Treasuries, the bank added.

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"Cutting the Fed Funds target to 50-100bps below zero would be [positive for US Treasuries] especially as if such policy action is in response to a bleak economic backdrop and rising deflation risks."

"We expect the Fed to continue to purchase [US Treasuries] in tandem with the negative fed funds target rate, even if such a decision were taken because previous policy steps had failed to achieve sufficient traction regarding activity and prices," Standard Chartered said.

Negative rates usually lead to a steepening of the 2-10 year yield curve, but the bank said the cuts below zero may not have the usual impact.

German Bund yields did not turn negative until the ECB deposit rate reached -0.3% in 2015 and 10-year Bund only turned negative last year when expectations mounted that the ECB would reduce rates further to -0.5%, the bank noted.

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Standard Chartered said: "Should the Fed cut to -0.5% and eventually -1% and continue its [Treasury] buying, we could see the 10-year real yield at least retesting its low near -1% from late 2012 and the 9 March flash crash."

The bank said a cut to -0.5 to -1% would push the yield curve negative as far out as the 10-year Treasury, effectively meaning that the government would be paid to borrow money.

Read more: GOLDMAN SACHS: Buy these 25 stocks that are wildly popular with hedge funds - and have crushed the market this year. Negative rates would push gold higher Reuters / Krishnendu Halder The bank also is betting on an uptick in gold, as falling interest rates lower the opportunity cost of holding gold, which does not receive an annual return. "Negative rates in the US could unleash a sizeable untapped allocation to gold in the US and on a broader scale. "When US yields flirted with negative territory earlier this month, gold responded by gaining almost 3% during the trading session." Read more: Billionaire investor Mario Gabelli's flagship fund has delivered a 3,082% return since its inception. He told us his 13 favorite stocks right now - and the trends he's betting on for a post-coronavirus world. "A key question would be whether negative interest rates are passed onto retail customers. The US Mint has already reported the strongest YTD gold coin sales since 2017 in an environment of low interest rates, record stimulus and heightened uncertainty. Standard Chartered added: "Although the USD is a not a key driver for gold prices in the current environment, the relationship between the two usually strengthens during period of USD weakness. Thus, our expectations of a weaker USD in most scenarios intensifies the positive backdrop for gold prices." Gold prices have risen about 88% since the beginning of the year and it is currently hovering around $1708.80 per ounce as of 10:40 a.m. ET. NOW WATCH: Pathologists debunk 13 coronavirus myths See Also: 5 charts show how the coronavirus crisis has dwarfed the Great Recession in just 2 months 'Likely to be excruciating': A notorious stock bear says investor reliance on Fed money-printing is misguided and warns of more than 50% crash from current levels Treasury Secretary Mnuchin sees 'strong likelihood' that further stimulus is needed as Senate spars over new bill

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