Are Negative Rates Going To Be Helpful To Me?

There has been a phenomenon in Japan and Europe in recent years called Negative Interest rates – a situation whereby the bank receives money from the customer to hold their deposits and the bank, in turn does the same when it stores excess reserves in its’ country’s Central Bank. Mostly this has been a result of frustrating and persistently low national productivity rates (GDP) in places like Japan and the European Community. Both places have had economic performances that are a fraction of the USA’s since 2009. A traditional monetary policy tool among developed economies is to raise rates when the economy overheats, and to loosen rates when contraction occurs. Currently, the opposite appears to be occurring in the USA – while Europe and Japan are struggling to make these traditional monetary tools an effective engine of growth in an equally non-traditional way. That is – in a negative interest rate environment. The President of the United States (POTUS) joined the conversation recently suggesting that the US Federal Reserve should cut rates dramatically (“…to ZERO, or less”) to lead the way in this modern but unusual monetary trend.

What Are Negative Interest Rates?

This raises the question: “What would negative interest rates look like for the consumer or business owner”? Well, according to the POTUS, the US economy would take off and expand even more than it has for the record-setting past 11 years. There is considerable disagreement as to whether that would actually happen. As it is, the POTUS has already managed to get The Fed to cut rates for the first time since 2019 – ostensibly to counter the headwinds introduced by the POTUS’s trade war with China. This is an unusual development historically given that so much strength has been exhibited elsewhere within the US economy of late. Let’s take a closer look at what Negative Rates might mean on the ‘Good’ as well as the ‘Bad’.

The Good:

Cheaper Credit usually always boosts business and consumer investment in the larger economy
Rising markets may ease some of the negative market sentiment that has recently surfaced
Lower interest rates in comparison to other countries would most likely cheapen the US Dollar making American exports and manufacturing cheaper around the world – furthermore, it might reduce the US-China trade deceit that so vexes the POTUS.
Excellent for homeowners looking to refinance as well as new home purchasers. Theoretically, one’s principal portion of their mortgage payment could be slightly subsidized by the interest rate rather than inflating it.

The Bad:

Savers are punished. Many investor retirees, especially, have spent a lifetime using traditional, reasonably risk-free instruments such as bonds, deposit certificates or bank accounts to accumulate savings for retirement or income from within it. For the first time since before the Great Recession, rates of savings in America have begun to climb – and the timing of this has coincided with the rising interest rates that began in 2016. These savers resisted moving to ETFs or mutual funds in the past and are unlikely to fundamentally alter investing patterns late in life. Some other Savers just simply appreciate a conservative wealth management strategy.
Inflation numbers are lagging indicators – meaning that by the time that policy makers notice a “hot” inflation reading, it might be too late to reduce interest rates as corrective action. When this occurred in the post-Nixon economy in the mid to late 1970s, only years crushing interest rate hike coupled with inflation, and finally an extended economic recession, brought the economy back to anything considered normal. It should be noted that interest rates peaked around 14.5% – over 12% higher than we are at right now. Interest rates stayed at historically high levels right through the 1990s.
During the last downturn, The Great Recession of 2008-09, The Fed dropped interest rates from over 5% to 0.5% to try to stimulate a recovery. It worked. The concern among some is that, after 11 years of economic expansion, if rates are not raised – or at least left where they are currently — there will be no wiggle room left to provide the traditional, historically tested monetary policy solutions of the past: that is, cutting interest rates to stimulate an economy mired in recession.
While the thought of being paid to borrow money for a house sounds delightful, banks play a significant role in western economies for consumers and businesses, alike. There is no benefit in seeing this entire vital sector of the economy squeezed to the point that their traditional business model is suddenly unprofitable. The greater likelihood is that the banks will start charging more fees-for-services on items such as deposit certificates, checking accounts, overdrafts, credit applications, statements, safety deposits boxes, ATM access, transactions, etc., etc. This was actually confirmed to be true by JP Morgan Chase CEO Jamie Dimon this week when he said bank executives have discussed imposing certain fees on consumers if rates fall to zero.

Overall, it is difficult to see Negative Rates having a stimulative effect on a national economy when an entire sector of that economy is under such tremendous margin pressure. It could be easily argued that it may cause more harm than good as banks may decide to close the valves rather than open them up – they may decide that if they are told to lend at negative rates, they may decide to reduce risk by raising credit quality. This would most likely reduce the availability of credit (something that is not an issue, currently) – which is what happens during a recession – the very scenario the POTUS is desperately trying to avoid.

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