Imagine a backward world of “negative interest rates'' where banks charge you to save your money and pay you to take loans. Now forget it, because that’s never going to happen, even though that seems like the back-of-the-envelope implication of the unconventional monetary policy called for by President Donald Trump in tweets and rejected by Jerome Powell, head of the Federal Reserve, which sets U.S. monetary policy.
One of the main levers the Federal Reserve uses to influence the economy is by setting the federal funds rate, the interest rate banks charge each other to borrow. This one rate is in turn used as a benchmark for banks on a wide variety of products from the credit cards in consumers’ wallets to the loan for the car they drive and the interest earned by the nest eggs in their accounts.
Loans are more expensive for a borrower when rates are high, and cost less over time when rates are low. The only thing less than zero is a negative.
That’s got some people excited that negative rates could be the secret to juicing an American economy reeling from coronavirus shutdowns, skyrocketing unemployment, and plunges in spending and risk-taking.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the 'GIFT.' Big numbers!” Trump tweeted on Tuesday.
Despite the pressure, Powell maintained his course of action, saying Wednesday that negative rates are "not something we're looking at," during a webcast with the Peterson Institute for International Economics.
Social media has reacted to the prospect of ever lower rates with jokes about “negative interest rate credit cards” that earn you money the more you shop.
“Will the interest rate on my credit card and student debt go negative too? Will I receive interest payments for borrowing money!!!? Is this a dream!?” tweeted Twitter user PubliusValerio.
“Stimulus for the people, everyone gets a 10K limit 25% negative interest rate credit card,” tweeted Twitter user Ken Wood.
Previously seen as a sort of theoretical thought experiment and a line that should never be crossed, the central bankers of some countries, notably slow-growing economies such as Japan and Switzerland, have experimented with setting negative interest rates.
“Negative interest rates are intended as a disincentive for people to hold cash instead of using money to purchase goods and spend money,” said William Isaac, a former Federal Deposit Insurance Corporation chairman, and co-chairman at the Isaac-Milstein Group. “The central banks of the world have gotten into a very bad place, beginning with highly unorthodox monetary policies during the crisis of 2008-2010. They don’t have many tools left to stimulate economic activity.”
These tools were effective in avoiding deflation, according to a paper by the Committee on the Global Financial System, though they did squeeze bank profits.
But “there is little if any evidence that negative rates actually stimulate growth, inflation, or improve bank lending,” said David Lebovitz, a global market strategist at JPMorgan Asset Management.
Long-term effects of negative interest rates can’t be fully determined either, the paper also warned.
It can be determined that setting rates to negative wouldn’t upend the cornerstone of banking where banks charge you interest on loans and pay you interest on deposits.
“Negative interest rates won’t filter down to the consumer level,” said Greg McBride, chief financial analyst for Bankrate.com. “No one is going to pay you to take out a loan, and banks will not charge money to put in a savings account.”
No one is going to pay you to take out a loan, and banks will not charge money to put in a savings account.
Banks could make up for the loss in lending income by increasing fees on checking accounts, overdrafts, ATM withdrawals, wealth management and mortgages.
“If we did see negative rates here, they would probably not impact the average consumer right off the bat,” Lebovitz said. “The experience in Europe suggests that only bank clients of a certain size would be subject to negative rates; everyone else would simply earn zero.”
For now, the Fed continues to push back against suggestions of a negative interest rate, and Powell said he believes it has plenty of tools left in its toolbox to help guide the economy.
Even if the rate is not negative, it does appear that a low interest rate environment is here to stay. Consumers with savings can try to stay competitive with inflation by putting their money in a high-yield online savings account.
But they should avoid money market funds, which “become an even worse alternative than they are now the lower rates go,” McBride said. "The yields are currently racing toward zero — and what happens to those funds in a negative rate environment is the trillion dollar question.”