By: Josh Koehnen, MsBA, CFP®
Negative interest rates are a byproduct of a change in the way certain countries manage their monetary policy. Germany and Japan are both examples of countries where their governments have created negative interest rates in the hope it will stimulate their economies. In the past, when central banks wanted to boost their economies and create inflation, they would lower the amount of reserves that banks were required to hold with the hope banks would loan out more money to consumers and businesses, putting those funds back into the economy. Now, with the creation of the negative interest rates, banks are being charged to keep their money in reserves instead of earning a small amount of interest on those reserves as we have seen historically.
For consumers, this means the interest your bank is paying you to keep your money with them will drop and could eventually reach zero, and you may even be required to pay a service charge for them to hold on to your savings. The reduction in interest rates will have more of an immediate effect on variable rate borrowing such as credit cards and lines of credit. It will take more time before they begin to influence longer term borrowing instruments such as fifteen- or thirty-year fixed mortgages.
With the recent turbulence and uncertainty in our own economy, some of the American people have begun to worry about the possibility of negative interest rates here in the U.S., especially considering the recent inversion of the yield curve. This fear may be valid. President Trump has stated many times he believes the lowering of interest rates, or even dipping into negative territory, is a great idea that would stimulate the US economy. He’s gone so far as to encourage the US Federal Reserve to lower interest rates like those in Germany and Japan. While the U.S. has not yet moved into the negative interest rate territory, they are certainly low, and we could see them move even lower. Foreign investors have flooded the US bond market in search of a positive, safe return and this rush of foreign investments has inflamed the inverted yield curve by driving long-term Treasury rates lower. My hope is the United States learns from other country’s mistakes and realizes this policy will not kindle growth in our economy but instead encourage consumers to hoard cash and take their investments elsewhere like we are now seeing in many European countries.
Investment Advisor Representatives offering advisory services through Premier Wealth Advisors (PWA), a registered investment adviser. Securities and additional advisory services offered through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. PWA and IFG are unaffiliated entities.