WHEN NEGATIVE COULD BE POSITIVE
Several central banks around the globe have cut interest rates below zero in bids to boost their economies. Is the U. S. next?
WASHINGTON — First Europe. Then Japan. Could the U. S. be next to turn to negative interest rates as a way to f ight economic doldrums?
That question was raised last week by lawmakers quizzing Federal Reserve Chairwoman Janet L. Yellen, who voiced skepticism.
But the prospect of negative rates — in which depositors pay banks for the privilege of stashing money rather than earning interest — isn’t as far- fetched as it once was
Negative interest rates for certain funds already is the new normal in some of the most advanced economies. Since 2012, central banks in Denmark, Switzerland, Sweden and the 19- nation Eurozone have cut rates below zero, meaning commercial banks must pay them to park the cash they hold for clearing purposes and to meet minimum reserve requirements.
Last month, the Bank of Japan joined the club, adopting a minus 0.1% rate on commercial bank deposits.
These central banks are turning to negative interest rates — once thought to be an economic and political impossibility — to provide an additional instrument in their toolbox for f ighting off recessions and economic slowdowns.
By charging f inancial institutions to hold their money, central banks hope sub- zero rates will prod private lenders to make more loans to businesses and consumers, thereby stimulating the economy.
The tactic also could be used to combat the threat of def lation, a potentially crippling condition of falling prices for goods and services that can lead to hoarding cash, putting off purchases and rising real debt payments. So far, negative rates generally haven’t spread to ordinary depositors, although some European banks are charging corporate customers for safe- keeping their money.
Experts have long predicted that consumers, particularly in America, would never accept negative rates.
“It would scare the American public to death,” said Chris Rupkey, chief f inancial economist at Union Bank in New York, who said he doesn’t see the economy unraveling to the point where the Fed would need to resort to negative rates.
It was assumed that if rates went negative, depositors would withdraw their money and put it under their mattresses. It might also lead to new and unpredictable behavior, such as businesses and consumers opting to pay for goods and services upfront or in advance for several months, rather than hold money in bank accounts charging them a penalty.
But others predict depositors probably would swallow the new costs, albeit reluctantly, just as they have accepted other kinds of banking charges and fees.
And with interest rates so low, ordinary bank customers already are seeing a negative interest on their deposits after adjusting for inf lation. The latest annual inf lation rate through December was 0.7%, but a one- year certificate of deposit has paid an average interest of less than 0.3% since November 2012, according to Bankrate. com.
For consumers like Shukry Cattan of Santa Ana, the idea of negative rates doesn’t sound so crazy since he’s grown accustomed to expecting little, if any, interest on deposits. The 33- yearold, who works at the UCLA Downtown Labor Center, says he uses his savings account as a way to hold money temporarily for vacations or big purchases.
“I feel like I’m paying more than I should keeping an account,” he said of having to maintain a $ 300 balance or pay a fee. “We’re also used to paying money for ATMs. It sounds preposterous, but we’re conditioned now to accept it. You feel like you’re stuck. The alternative is to put it under my mattress.”
How well negative interest rates have worked is debatable, but most economists think they’ve had some success in Europe. Lowering rates below zero has helped to stem the appreciation of Swedish and Swiss currencies and significantly push down the value of the euro against the dollar, a boost for exporters in the single- currency zone.
“It’s certainly the case the European Central Bank avoided outright def lation,” said Jacob Funk Kirkegaard, a Europe economy expert at the Peterson Institute for International Economics.
In the U. S., where the economy is stronger but also facing questions about its future, the central bank is moving in the opposite direction.
Following solid job growth and other positive signs in the recov- ery, the Fed lifted rates in December after holding them near zero for seven years. Today, the Fed’s benchmark short- term interest rate is effectively 0.38%, and commercial banks still pocket money for parking their reserves with the institution.
Unless the economy weakens significantly, many analysts expect Fed policymakers to slowly raise rates a little further, not cut them.
But amid the recent stock market turmoil, fears surrounding China’s slowdown and a plunge in oil prices, there are growing concerns about the strength of the U. S. economy and what ammunition the Fed might have to combat a recession.
In 2010, after the Fed had lowered rates as far as it could in response to the Great Recession, central bankers considered going negative, but rejected the idea, Yellen said. Instead, it launched on a policy known as quantitative easing, in which it attempted to increase the money supply by purchasing government securities.
Asked about negative interest rates this month, Yellen said that the Fed is studying the issue and that the idea is not “off the table.” At the same time, she doubted such a step would be needed.
Even so, in this year’s stress test of banks — in which the Fed requires banks to submit a simulation of how they might handle adverse conditions — some 30 large banking f irms were asked to estimate what could happen should rates be cut to below zero.
Some bank economists and other analysts think negative rates are a terrible idea. They blame the recent market turbulence partly on central bank policies to roll out negative rates.
Frank Sorrentino III, chairman of ConnectOne Bank, a New Jersey- based community lender with $ 4 billion in assets, said he was less worried about a public backlash against negative rates because any such debate would probably be overshadowed by the dire economic problems that would need to be present to force the Fed to take such an unprecedented step.
“For there to be negative interest rates,’’ he said, “there would have to be a hell of a lot of problems that are more important.”
‘ It would scare the American public to death.’
— CHRIS RUPKEY, chief financial economist at Union Bank in New York, on negative interest rates