Federal Reserve Chair Janet Yellen was asked by Congress last week whether negative interest rates are a possibility in the U.S. Her response: the Fed wouldnt take those off the table as an option, should the economy falter.
Negative interest rates are already a reality in Europe and Japan. Retail banks must pay interest on reserves held at the central bank. Banks can then decide whether to pass negative rates on to consumers through low rates on loans, or low or even negative deposit rates. The aim is to encourage banks to lend and discourage consumers from saving, thereby stimulating the economy.
We believe negative rates are unlikely in the U.S. any time soon. If the Federal Reserve did not resort to negative rates during the 2008 financial crisis, it is unlikely they will in the future absent extreme circumstances. Should the economy head south, the Federal Reserve would first be able to cut rates to zero. The likely next step would be additional bond purchases (so-called quantitative easing).
Bottom line: investors should treat negative interest rates as more of a hypothetical scenario than a potential reality at this point.
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