Something very interesting has been happening in the economic world the past few weeks. Interest rates are falling so low, that in some areas they’re negative! That’s right, and interest rate which is less than zero. How can this even exist? What does it mean for you?
Why the negative interest rates?
First off, we need to realize the negative interest rates are coming from central banks, like the Fed but in other countries. Why would a bank want to do this? Theoretically, they think it will help spur the economy. They believe if banks have very little incentive to keep their money in the central bank, because they’re making no return on it, then the banks will do something else with it, like lend the money out.
A few countries are doing this. The European Central Bank, Sweden, and Japan have all seen their interest rates fall below zero. With a growing number of countries resorting to negative interest rates, it has been brought front and center in economic news.
What could this mean for the economy?
Negative rates are unprecedented. There aren’t really good theoretical models for what will happen next or in the long term. But based on what we’ve seen so far, the answer is that they are not a good thing.
Stocks have fallen in areas with negative rates. Negative interests send a signal to investors that the economy is weak, and although it should theoretically make investing cheaper, the uncertainty only pushes the market into even more volatility.
Furthermore, this could hurt banks instead of encouraging them to loan more. With rates so low, banks could end up owing more than they earn. Why should we care about banks struggling? Well, it could lead to a credit crunch. If banks do not earn enough on their assets to support what they loan out and owe, they will stop loaning so much and credit will become less available.
Will we see negative interest rates in the US?
As of now, the Fed still maintains it wants to raise interest rates. While they have acknowledged negative rates could be theoretically possible, they reassured investors this scenario would be very improbable.
One thing is for certain. The negative interest rate environment will definitely make it much more difficult for the Fed to stay the course and keep raising rates. Negative rates and global concerns make it more improbable raising rates will continue.