Negative interest rates would make borrowing money cheap and saving money expensive, the reverse of what we have now
- There’s speculation about the possibility of the Federal Reserve implementing negative interest rates in response to the coronavirus.
- Negative interest rates would result in lenders paying you when you take out a loan, and you’d pay a fee to keep money in banks.
- Both of these results would be intended to stimulate the economy.
- Jerome Powell, chairman of the Federal Reserve, has said negative interest rates aren’t on the table.
The Federal Reserve has already cut the federal funds rate twice in 2020, and there’s debate about whether the agency should lower rates again.
Low rates are often a sign of a struggling economy. When rates decrease, people are more likely stimulate the economy by taking out loans and swiping their credit cards. And as the coronavirus pandemic drags on, the US economy is taking a hit.
Right now, the federal funds target rate is 0% to 0.25%. If the Fed lowered rates again to help the US economy, rates would drop below zero.
Negative interest rates are controversial, but countries such as Switzerland, Denmark, and Japan have already implemented the system.
What would negative rates mean for American consumers? Basically, you would earn money when you borrow and spend money to keep your money in a bank account.
Negative interest rates would make it more affordable to borrow and more expensive to save with a bank
Low rates have already made it more affordable to take out a loan and less beneficial to keep your money in a savings account. Mortgage rates are at historic lows during the pandemic, and banks’ rates are gradually dropping so you earn less by keeping your money in an account.
Negative interest rates would take things to the next level. Here’s how:
If you take out a loan at a negative interest rate, you don’t pay interest on the amount you borrow. Instead, the lender would pay you.
Right now, you end up paying more than the amount you originally borrow over the course of your loan because interest accrues. With negative interest rates, you’d end up paying back less than you borrowed, so you’d earn money in the long run.
Negative interest rates would encourage people to buy homes, use credit cards, and take out other types of loans. By spending more, people would be helping the US economy.
Right now, you may be stashing your money in a bank account and earning interest.
If the federal funds rate dropped below zero, you wouldn’t earn interest at your bank — you’d actually pay a fee to keep your money in the bank. This fee would be relatively small — maybe a few dollars per month.
Charging people to keep money in the bank is meant to encourage people to spend their money, which puts money back into the economy.
Negative interest rates are unlikely in the US
There has been plenty of debate about negative interest rates during the coronavirus pandemic, and President Trump has publicly praised the idea.
The Federal Reserve is the agency in charge of slashing rates, though, and Fed Chair Jerome Powell isn’t convinced.
In an interview with “60 Minutes,” Powell said, “There are plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve. And I think it’s an area of real uncertainty in the central banking world.”
For now, negative interest rates look unlikely for the US economy.