Negative interest rates are spreading like a virus. Central banks in the Eurozone, Switzerland, Sweden, and Japan all have below-zero interest rates. “NIRP,” as economists call a negative interest rate policy is a desperate move-but the only move those banks think they have available.
Negative interest rates are now fully possible in the United States. But, first let’s discuss what NIRP means.
Negative interest rates are an attempt by the central banks to push commercial banks to lend more money to business and consumers rather than maintain large balances at the central bank that costs them interest. Said differently, these banks must now pay the central bank to keep their surplus cash accounts.
This does not guarantee that the banks will lend more money freely. If the underlying economy is not growing significantly, the banks are more likely to pass this cost onto its customers by charging them to “store” their money.
Bank depositors may decide to hoard their money instead of being charge to keep it at the bank. Japan’s negative interest rates are driving up sales of safes. So, it appears the hoarding has begun.
Negative interest rates have not appeared to stimulate economic growth in Europe. In short, future downward interest rates by the European Central Bank will seriously impair European baking industry, increasing instability in European markets. Negative interest rate policy will most likely hurt European economic growth, not help it.
So why in the world would the Federal Reserve go down the same path as Europe? Is it even possible? Many observers are saying yes it is possible and likely in the next U.S. recession.
The Fed’s Jackson Hole retreat explored such a possibility. The lead presenter, Marvin Goodfriend of Carnegie Mellon University, is a strong proponent of NIPR. His paper “makes the case for unencumbering interest rate policy so that negative interest rates can be made freely available and fully effective as a realistic policy in future crisis.” In other words, Mr. Goodfriend thinks the banks should charge you to store your money.
The Fed Chair, Janet Yellen’s, own Jackson Hole speech had a footnote describing a monetary policy rule that would have sent rates down to negative 9% in late 2008. Clearly, NIPR is on her mind.
In summary…Previously Unthinkable Is Now Fully Possible…The evidence appears the U.S. Federal Reserve will in fact consider using negative interest rates in the next recession. However, that won’t help economic growth if there is no demand for additional borrowing.
This author suggests that negative oppressive regulatory policies and high taxes have a much greater impact on economic growth than negative interest rates ever will. A few industries that are currently being gutted by U.S. regulatory practices include medical, pharmaceutical, real estate, manufacturing, insurance, and construction. These industries have had major revenue declines and/or massive cost increases leading to significant layoffs of workers.
What to do to project yourself?…Consider higher interest alternatives to commercial banks which my start charging you to keep your money. More on this in later additions of this newsletter.
References: John Mauldin, The Fed may be preparing for the unthinkable-negative interest rates in America, Yahoo! Finance, September 3, 2016; Charles Kane, Here’s Why Negative Interest Rates Are More Dangerous Than You Think, Fortune, March 14, 2016