{"id":6127,"date":"2021-01-04T15:20:58","date_gmt":"2021-01-04T20:20:58","guid":{"rendered":"https:\/\/dankrell.com\/blog\/?p=6127"},"modified":"2021-01-04T15:21:01","modified_gmt":"2021-01-04T20:21:01","slug":"negative-interest-rates-redux","status":"publish","type":"post","link":"https:\/\/dankrell.com\/blog\/2021\/01\/04\/negative-interest-rates-redux\/","title":{"rendered":"Negative Interest Rates Redux"},"content":{"rendered":"\n
\"negative<\/a>
Average mortgage rates by decade <\/figcaption><\/figure><\/div>\n\n\n\n

Negative interest rates used to be a controversial topic.\u00a0 However, countries such as Japan and those in the European Union entered into the uncharted waters to stimulate their economies in the years following the Great Recession.\u00a0 Back in 2015 <\/a>there was speculation that the US was headed into negative interest rates too.\u00a0 But those thoughts quickly vanished as the economy rapidly expanded after 2016.\u00a0 But with the prospect of more economic distress down the road with on-and-off again lockdowns and business restrictions, are negative interest rates on the table again?<\/p>\n\n\n\n

What are \u201cnegative interest rates?\u201d\u00a0 A very rudimentary explanation is it\u2019s when interest rates go below zero.\u00a0 Meaning that instead of borrowers <\/a>paying interest on loans, the lender pays the borrower.\u00a0 It may sound backward to what we are used to, but it is a \u201ctool\u201d that central bankers may employ in times of severe financial crisis.\u00a0 <\/p>\n\n\n\n

Although\nmany economists contend that negative interest rates are a viable short-term\noption to respond to a severe financial crisis, it is uncertain the policy\nworks as intended.  Negative interest\nrates expose a vulnerable economy to future financial downturns.  Additionally, some are concerned about long-term\ndeflationary effects, while others fear it results in hyperinflation.  Some experts point to the potential of a paradoxical\neffect of freeze community lending.  This\ncan occur if investors hold onto their cash, instead of depositing it with banks\nfor zero interest (or even having to pay the bank to hold their money).  This lack of investment has the potential will\nreduce banks\u2019 available capital to lend. \n<\/p>\n\n\n\n

The possibility of negative interest rates in the US is once again a hot topic.\u00a0 A 2020 NAR report<\/a> discusses this option (Expectations & Market Realities in Real Estate 2020-Forging Ahead<\/em>; nar.realtor):<\/p>\n\n\n\n

\u201cThere is nothing stopping the U.S. from moving into negative interest rates, but several issues would arise should the U.S. decide to take that plunge. One of the biggest fears is that the FOMC [Fed Open Market Committee] would not have any tools left to employ when the next downturn occurs.\u00a0 Global investors might lose faith in the safety of U.S. government bonds as negative interest rates and other forms of quantitative easing may be perceived as a sign of weaknesses in the economy. In addition, the portfolios of millions of U.S. investors would likely be hurt. According to the Office of Management and Budget, $16.8 trillion of the government\u2019s $22.7 trillion debt is held by the public of the U.S. \u00a0A large portion of the holders of U.S. debt are retired or soon-to-be retirees who have their portfolios in risk-free U.S. Treasurys. Many federal programs, including Social Security, Medicare and Medicaid, are also heavily invested in Treasurys, meaning these public programs would most likely lose money on the aggregate due to negative interest rates<\/em>.\u201d<\/p> (Expectations & Market Realities in Real Estate 2020-Forging Ahead<\/em>; nar.realtor) <\/cite><\/blockquote>\n\n\n\n

Could\nwe see negative interest rates in the US? <\/h3>\n\n\n\n

In their recent statement <\/a>of the FOMC (federalreserve.gov), the Federal Reserve believes that although economic activity and employment are recovering, the health emergency has caused a tremendous human and economic hardship in the US (and globally as well).\u00a0 If extraneous events are unchanged, \u201cOverall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses<\/em>.\u201d\u00a0 However\u2026\u201cThe path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term<\/em>.\u201d<\/p>\n\n\n\n

Original published at https:\/\/dankrell.com\/blog\/2021\/01\/04\/negative-interest-rates-redux<\/p>\n\n\n\n

By Dan Krell
Copyright \u00a9 2021<\/p>\n\n\n\n

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\"Protected<\/a><\/figure>\n\n\n\n

Disclaimer<\/a>.\n This article is not intended to provide nor should it be relied upon \nfor legal and financial advice. Readers should not rely solely on the \ninformation contained herein, as it does not purport to be comprehensive\n or render specific advice. Readers should consult with an attorney \nregarding local real estate laws and customs as they vary by state and \njurisdiction. Using this article without permission is a violation of \ncopyright laws.<\/p>\n","protected":false},"excerpt":{"rendered":"

Negative interest rates used to be a controversial topic.\u00a0 However, countries such as Japan and those in the European Union entered into the uncharted waters to stimulate their economies in the years following the Great Recession.\u00a0 Back in 2015 there was speculation that the US was headed into negative interest rates too.\u00a0 But those thoughts … <\/p>\n

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