NO NEED TO NEGATIVE

NO NEED TO NEGATIVE

Here’s what negative interest rates

from Fed would mean for you

The Federal Reserve has never brought its benchmark rate into negative territory and, according to Fed Chairman Jerome Powell, the central bank is not considering going to negative interest rates now.

Experts agree. “I view that as an eventuality but not in the near term,” said Greg McBride, chief financial analyst at Bankrate.com. 

The Fed has already taken several aggressive steps to preserve the flow of credit, including slashing interest rates to near zero and pumping liquidity into strained areas of the financial markets. What comes next is the challenge.

President Donald Trump has been advocating for negative interest rates long before the coronavirus pandemic brought the economy to a standstill, arguing that erasing borrowing costs would spur economic growth.

“Negative interest rates sound like fun, but it’s nothing to wish for,” McBride said.

“It hasn’t even proven to be effective,” he added. “Parts of Europe have had negative interest rates for seven years and it hasn’t done anything — their economies were reeling then, they’re reeling now.”

And even if the federal funds rate, which is what banks charge one another for short-term borrowing, fell below zero, that is not the rate that consumers pay.

fed rate moves

fed rate moves

The prime rate, which is the rate that banks extend to their most creditworthy customers, is typically 3 percentage points higher than the federal funds rate.

 

 

For everyday Americans, negative interest rates would likely result in even lower mortgage rates and credit card rates, but “nobody is going to pay you to take out a loan,” McBride said.

In fact, with so many people under severe financial strain, its getting harder and harder to borrow at all.

Despite already rock-bottom interest rates, banks are tightening lending standards across the board, shrinking the availability of credit.

It’s more likely that savers will lose any benefit to stashing cash, said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace.

“The detrimental effects to savers are immediate and clear,” he said. “This erodes earnings for savers and may force them into more risky financial instruments in search of yield.”

Sweden ditches negative interest rates

Sweden has ended its experiment with negative interest rates. The Sveriges Riksbank, the world’s oldest central bank, has raised the main interest rate from -0.25% back to zero.

The world’s oldest central bank has raised interest rates back to zero

Sweden has ended its experiment with negative interest rates. The Sveriges Riksbank, the world’s oldest central bank, has raised the main interest rate from -0.25% back to zero, reports thelocal.se.  The rate had been in negative territory since 2015, but policymakers say that with inflation running at 1.8% in November it is now close enough to the 2% target for a return to zero interest rates.

Sweden’s central bank was one of the pioneers in “wielding negative interest rates”, says Paul Hannon in The Wall Street Journal. The eurozone and Japan have since followed suit. Negative rates mean that commercial banks are charged for holding money in accounts at the central bank. That is supposed to encourage them to lend it out to businesses and consumers, promoting greater spending and investment in the real economy. The policy also weakens the national currency and helps exporters. Yet with Swedish private-sector debt climbing to 285.7% of annual output last year, one of the highest rates in the OECD, concern has been mounting that the policy could have “harmful side effects”.

Unconventional monetary policy has a variety of unpleasant consequences, says Mohamed El-Erian on Bloomberg. It undermines the profitability of the banking sector and encourages excessive risk-taking. It keeps zombie companies that deserve to go under afloat, which erodes growth and productivity.by distorting price signals and inflating asset bubbles it can also lead to “economy-wide resource misallocations”.

Sweden’s interest-rate move is “the most explicit signal yet” of the backlash against the “collateral damage and unintended consequences” of unconventional monetary policy.