Will the Fed use negative interest rates to counter deflation?

Article 5 (page 24) of the new edition of "Reading and Understanding the Financial Times" examines the role of the US central bank (The Fed). Towards the end of last week the Fed's actions began to dominate the FT's main news stories. In the Markets section of the weekend FT James Mackintosh discussed the options facing the US central bank at a time when deflation once again seems like a serious risk. As he says "the US central bank has already cast aside its main weapon, interest rates, having slashed it to zero in the wake of Lehman Brothers' collapse" (the long view page 22, FT August 14/15 2010). So this raises the possibility that the Fed will once again resort to a period of quantitative easing which I have fully explained in some earlier blogs. In the same article the author also discusses even more extreme measures. These include using negative interest rates as tried in Switzerland in the 1970s. The idea is that if the US banks faced the reality of negative interest rates on their deposits held at the Fed this would encourage them to reduce these holdings to a minimum and instead become more willing to lend to individuals and corporations helping to fuel some kind of economic recovery. This might seem like an extreme and unlikely measure but as James Mackintosh ends his article "only be experimenting will we find out if it has the firepower to break deflation".