May 25th, 2020 12:25 PM by Jackie A. Graves
The U.S. economy is slipping into what could be a severe
recession, and the Federal Reserve is taking unprecedented measures to help it
survive the consequences of the COVID-19 pandemic.
The Fed stepped in with an emergency rate cut in March. It
has injected $2.3
trillion into the economy through emergency initiatives such as buying municipal
bonds and lending money to small and mid-size businesses that don’t qualify for
Small Business Administration emergency loans. It’s even buying corporate bond
These measures show the Fed is doing whatever it takes to prop
up the economy. Until now, it had never utilized its authority to purchase
municipal bonds or ETFs. But there has been heated debate over a controversial
monetary policy tool that’s also at the Fed’s disposal: Negative interest
They’ve been used by other global central banks, to mixed
results. Are negative interest rates really in the cards for the U.S.? If so,
what might they mean for your wallet? Here’s what you should know.
Interest rates are one of the main levers the Federal Reserve
uses to adjust monetary policy and maintain balance in the U.S. economy. The
central bank adjusts the federal funds rate to guide how individual banks and
lenders determine their own rates.
The Fed raises interest rates to help cushion the economy
against inflation, because higher rates make borrowing by consumers and
businesses more expensive. It lowers interest rates when the country is facing
a recession because it encourages borrowing and spending, which stimulate the
So what about negative interest rates? If a central bank
implements negative rates, that means interest rates fall below 0%. In theory,
negative rates would boost the economy by encouraging consumers and banks to
take more risk through borrowing and lending money.
In economic downturns, people typically hold onto their money
and wait to see some sort of improvement before they ramp up spending again. As
a result, deflation can become entrenched in the economy: People stop spending,
demand declines, prices for goods and services fall, and people wait for even
lower prices before spending. It’s a pernicious cycle that can be very hard to
Negative rates fight deflation by making it more costly to hold
onto money, incentivising spending. Theoretically, negative interest rates
would make it less appealing to keep cash in the bank; instead of earning
interest on savings, depositors could be charged a holding fee by the bank.
Simultaneously, negative interest rates would make it more appealing to borrow
money, since it would push loan rates to rock-bottom lows.
In 2014, the European Central Bank (ECB) was the first central
bank to adopt a negative interest rate policy, to address the eurozone crisis.
The ECB lowered its deposit rate to -0.1% that year in an attempt to hold off
deflation and move the economic bloc out of a protracted malaise. Today, the
current ECB deposit rate is -0.5%, the lowest on record.
The Bank of Japan (BoJ) has been fighting deflation for two
decades. It was the first central bank to move to a zero interest policy in
1999, and its key rate has been negative since 2016. Neither the BoJ nor the
ECB have been able to move rates back into positive territory.
In Europe, inflation has remained anemic and many argue that
consumers have simply responded to negative rates by moving their savings
around to banks offering higher yields, even if it’s by a few tenths of a
percentage point, as reported by the
Wall Street Journal. Some banks report that big depositors are requesting their
physical cash be put in vaults where it can avoid the negative interest rates,
and businesses have held back on spending and resisted the “temptation of cheap
One research paper
from the ECB found no evidence that negative rates were incentivizing
households, corporations and non-bank financial institutions to keep more cash on
hand with the intention of pumping it into the economy. Meanwhile, a research paper from
the Swedish House of Finance suggests the opposite, stating that the monetary policy
remains effective when it’s implemented with measures to make it more costly
for hoarding cash.
You’ve probably heard some buzz around negative interest rates
over recent weeks. President Donald Trump has expressed his interest on
Twitter, calling negative interest rates a “gift” for the economy. Investors in
future markets have started betting on the Fed implementing them, helping to
keep the idea in the headlines.
But the Federal Reserve insists negative interest rates are not
on the table.
As of now, the Fed remains adamant against implementing negative
rates as a tool to help stabilize the U.S. economy, even assuming they would
work as promised. Federal Reserve Chairman Jerome Powell has repeatedly said
that negative rates are not something that will be implemented.
“I continue to think, and my colleagues on the Federal Open
Market Committee continue to think that negative interest rates is probably not
an appropriate or useful policy for us here in the United States,” said Chairman Powell
in a recent 60 Minutes interview. “The evidence on whether it helps is quite mixed.”
Joe Brusuelas, chief economist at RSM, believes implementing
negative interest rates wouldn’t be an easy task. Plus, he also doubts they
would be the best way to help the economy now—although implementing them
wouldn’t be an impossible undertaking for the Fed.
“It’s very difficult to do and it requires some pre-conditions
to be set by regulatory agencies and the central bank to make it work,”
Brusuelas says. “It’s highly conditional. You’re only going to do this under
very specific or quite dire circumstances. This isn’t something that’s going to
be turned to just because the bond market is turning to a wavy type recovery.”
Even if negative interest rates remain a very distant
possibility, it’s always good to understand how monetary policy can affect your
financial situation. Negative interest rates would change a variety of personal
finance aspects. Here’s how:
Negative interest rates are a monetary policy tool for
unprecedented economic times, and some argue they require complementary
regulations to make them work. The Federal Reserve has repeatedly said it’s not
looking to implement them at this time, but having a general idea of how
negative interest rates could potentially affect you in the future is worth
making an effort toward.
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