Savings: The dawn of negative interest rates
How low could the Federal Reserve possibly go? asked Jeanna Smialek in The New York Times. That’s the question, after President Trump urged the central bank to “get our interest rates down to ZERO, or less,” last week. Going negative would be uncharted territory for the United States, and given the relatively strong economy, it’s unlikely the Fed, which currently charges banks a benchmark rate of 2.25 percent, would get to that anytime soon. But overseas, “several of the Fed’s counterparts,” including central banks in the European Union, Scandinavia, and Japan, have introduced negative rates. That means that instead of commercial banks earning interest on the reserves they keep at a central bank, they now have to pay to hold money in those accounts. It’s essentially “a penalty aimed at pushing them to lend more” to juice the economy. Consumers still pay interest when they borrow, though one Danish bank has introduced a mortgage with a negative
0.5 percent interest rate, before fees. But people would also “earn less interest on their savings accounts”—in some rare cases, banks are even charging customers for keeping large deposits.
On the surface, low rates are a blessing, said Allan Sloan in
The Washington Post. “They make it cheaper for the federal government to finance” its deficits and allow “companies to use low-cost money to expand.” But look at who pays the price. “People trying to live off the interest on the savings they’ve accumulated over their lifetimes” see their incomes disappear. Pension funds can’t meet their return targets, leading to trillions of dollars in pension shortfalls. To meet the income expectations they had when they retired, older investors already need to turn to “bonds of riskier companies with longer maturities,” said Alexandra Scaggs in Barron’s. With recession indicators “warning of a slowdown ahead,” that’s not an appealing option. Zero or negative rates would make it even harder to find investments that provide meaningful income without a ton of risk.
“The president seems to think that Europe and Japan want negative interest rates,” said Brian Chappatta in Bloomberg.com. They don’t. They’re stuck with them because their economies are limping along, and they can’t risk raising borrowing costs. Trump also tweeted that after rates fall to zero “we should then start to refinance our debt.” Unfortunately, the government isn’t like a “company that issues bonds that can be bought back if borrowing costs fall.” If an investor bought a 30-year Treasury bond in 1995 that pays 7.625 percent interest, there’s no mechanism for the government to pay it off early. For a man who’s bragged that he’s the “King of Debt,” Trump has surprisingly little grasp of how government debt actually works.