"...there are strong global forces suppressing rates everywhere, and it could mean negative rates remain a feature of markets and at least a theoretical possibility here."
From YahooFinance
Negative interest rates: Coming to America?
Yahoo Finance | By Michael Santoli
February 13, 2015
American savers have had it hard enough, earning next to nothing on bank deposits and money market funds. But could it get worse, with banks here charging depositors interest to hold their money and high-quality bonds yielding nothing at all?
It might seem a curious question, given broad expectations for higher U.S. interest rates, as job growth gathers momentum and the Federal Reserve has openly hinted it is eager to end its seven-year policy of near-zero short-term interest rates.
Yet a collapse in interest rates overseas and the continuing risk of financial shocks is spurring Wall Street economists at least to mull the unlikely prospect of such a scenario developing here.
The specter of negative interest rates has been sweeping across Europe for months. The European Central Bank and those of Switzerland, Sweden and Denmark have set official overnight interest rates among banks below zero in an aggressive effort to encourage borrowing, energize economic growth and stave off deflation, a spiral in which people continually expect prices to fall.
As a result, some banks in Denmark are charging customers for the privilege of keeping their money in deposit accounts there.
Economists at Goldman Sachs Friday explored the possibility that, under unexpected and unwelcome circumstances, rates in the U.S. could slide below zero as well.
The firm concludes that it is “extremely unlikely” that the Fed would move in this direction.
For one thing, the U.S. is growing at nearly the fastest rate among mature economies, which has led the Fed to set the stage for the first short-term interest rate hike in nearly nine years.
Wall Street is debating whether this might occur in June, September or perhaps early 2016. But for now, Fed Chair Janet Yellen’s stated intention and the market consensus is that the next move for rates is up, and likely within the year. If it happens, it will be a modest dose of good news for savers, who could expect to collect slightly more on their money.
Even if damaging financial shocks struck to derail the U.S. recovery or rupture financial markets, a rush to negative rates here appears unlikely. And without negative rates on money banks deposit with the Fed, consumer interest rates would not turn negative.
Goldman points out that even in the depths of the crisis, the Fed rejected the idea of eliminating the 0.25% it pays banks on their excess reserves kept at the central bank. Policymakers were concerned that it would upend the operation of money-market funds, which are viewed by many as a nearly risk-free equivalent to cash and are far more prevalent in the U.S. than in Europe.
There is also a sense that dropping rates below zero would have limited effectiveness in promoting faster growth, and individuals would likely respond by holding more savings in actual cash currency.
The growth rate of physical currency in circulation has indeed accelerated since the Fed dropped rates near zero in 2008. And this was not pocket cash meant for daily expenses.
“In fact,” Goldman economist Kris Dawsey says, “most of the increase in currency outstanding in recent years has occurred in $100 bills, which are less likely to be used for day-to-day transactions.”
The cost of safety
Still, there are strong global forces suppressing rates everywhere, and it could mean negative rates remain a feature of markets and at least a theoretical possibility here.
Large expanses of the global bond market reflect the gravity of zero-percent rates, as investors intent on keeping their capital safe accept negative yields on bonds – ensuring that over the term of the investment they will get back less than the amount paid.
Read more from YahooFinance >>
From YahooFinance
Negative interest rates: Coming to America?
Yahoo Finance | By Michael Santoli
February 13, 2015
American savers have had it hard enough, earning next to nothing on bank deposits and money market funds. But could it get worse, with banks here charging depositors interest to hold their money and high-quality bonds yielding nothing at all?
It might seem a curious question, given broad expectations for higher U.S. interest rates, as job growth gathers momentum and the Federal Reserve has openly hinted it is eager to end its seven-year policy of near-zero short-term interest rates.
Yet a collapse in interest rates overseas and the continuing risk of financial shocks is spurring Wall Street economists at least to mull the unlikely prospect of such a scenario developing here.
The specter of negative interest rates has been sweeping across Europe for months. The European Central Bank and those of Switzerland, Sweden and Denmark have set official overnight interest rates among banks below zero in an aggressive effort to encourage borrowing, energize economic growth and stave off deflation, a spiral in which people continually expect prices to fall.
As a result, some banks in Denmark are charging customers for the privilege of keeping their money in deposit accounts there.
Economists at Goldman Sachs Friday explored the possibility that, under unexpected and unwelcome circumstances, rates in the U.S. could slide below zero as well.
The firm concludes that it is “extremely unlikely” that the Fed would move in this direction.
For one thing, the U.S. is growing at nearly the fastest rate among mature economies, which has led the Fed to set the stage for the first short-term interest rate hike in nearly nine years.
Wall Street is debating whether this might occur in June, September or perhaps early 2016. But for now, Fed Chair Janet Yellen’s stated intention and the market consensus is that the next move for rates is up, and likely within the year. If it happens, it will be a modest dose of good news for savers, who could expect to collect slightly more on their money.
Even if damaging financial shocks struck to derail the U.S. recovery or rupture financial markets, a rush to negative rates here appears unlikely. And without negative rates on money banks deposit with the Fed, consumer interest rates would not turn negative.
Goldman points out that even in the depths of the crisis, the Fed rejected the idea of eliminating the 0.25% it pays banks on their excess reserves kept at the central bank. Policymakers were concerned that it would upend the operation of money-market funds, which are viewed by many as a nearly risk-free equivalent to cash and are far more prevalent in the U.S. than in Europe.
There is also a sense that dropping rates below zero would have limited effectiveness in promoting faster growth, and individuals would likely respond by holding more savings in actual cash currency.
The growth rate of physical currency in circulation has indeed accelerated since the Fed dropped rates near zero in 2008. And this was not pocket cash meant for daily expenses.
“In fact,” Goldman economist Kris Dawsey says, “most of the increase in currency outstanding in recent years has occurred in $100 bills, which are less likely to be used for day-to-day transactions.”
The cost of safety
Still, there are strong global forces suppressing rates everywhere, and it could mean negative rates remain a feature of markets and at least a theoretical possibility here.
Large expanses of the global bond market reflect the gravity of zero-percent rates, as investors intent on keeping their capital safe accept negative yields on bonds – ensuring that over the term of the investment they will get back less than the amount paid.
Read more from YahooFinance >>
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