Negative Interest Rates Increasing in Popularity Among Central BanksSubmitted by RDM Capital on July 22nd, 2016
Most investors are familiar with the low interest rate policy that the U.S. Federal Reserve and other central banks adopted after the Great Recession. Recently, however, the European Central Bank and the Bank of Japan have adopted negative nominal interest rates - once only seen in smaller economies like Sweden and Switzerland. While U.S. interest rates in the U.S. have occasionally been negative after factoring in inflation, it would be an extraordinary step for the Fed to adopt negative nominal interest rates here. Negative rates essentially mean that banks with deposits at a central bank are required to pay for their deposits. The purpose of negative rates is similar to low positive rates in that the goal is to counteract deflationary conditions and stimulate investment in the economy. But, the use of negative nominal rates is somewhat an act of desperation by a central bank with an uncertain impact on the global economy.
The article below provides a good summary of the history of the use of negative rates by central banks. It also makes the argument that negative rates are essentially a tax on the banking system, which, like any other tax on business, could be passed on to the consumer. This is why some argue that negative rates could actually hurt the economy more than it stimulates investment that would benefit the economy. As many retirees know, savings have already been punished enough through low rate policies and the last thing needed would be an additional tax on savings.