It’s not something we think about very often, but lower interest rates are entirely possible, interest rates which are not just a little tinge above zero or zero itself, but rates which are actually below zero, what is known as a “negative interest” rate.
Speaking of the last Federal Reserve board meeting, Fed Chair Janet Yellen said “negative interest rates was not something that we considered very seriously at all today.”
Well maybe not “today” and perhaps not “seriously,” but Yellen then fudged the issue even more with further commentary:
“I don’t expect that we’re going to be in a path of providing additional accommodation,” said Yellen, referring to negative interest, “but if the outlook were to change in a way that most of my colleagues and I do not expect and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools, and that would be something that we would evaluate in that kind of context.”
You can see the issues raised by Yellen’s comments:
First, if negative interest was off the table then Yellen could have simply said “no, negative interest rates will not be considered.” Instead, she left the door ajar.
Second, negative interest investments — deals where investors knowingly lend capital with the expectation of getting back less — are common worldwide. By one estimate there is currently $3.6 trillion in Europe and Asia invested with negative interest rates.
Third, no matter how high the fence and regardless of how wide the oceans, the U.S. is now part of the worldwide economic system — just think of the current oil surplus and how it’s been good for our motorists. In the same way that the laws of physics apply to everyone, so do economic rules. There is no reason why the negative interest seen in other countries cannot happen here.
In fact, we have had negative interest in the U.S. According to Forbes magazine, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992).
We’re also prepared for negative interest. As an example in 2011 The Wall Street Journal reported that Bank of New York Mellon depositors with more than $50 million in their accounts faced “an annual fee of at least 0.13 percent of the excess deposits. The fee would rise if the one-month Treasury yield dips below zero.”
Yellen’s comments were made in September, but swing forward a few weeks to October and now the conversation has become less guarded.
CNBC’s Steve Liesman asked New York Fed President Bill Dudley if we could use “negative interest rates as the next tool for stimulating the economy?
“It’s obviously an option,” said Dudley, head of the most-important Federal Reserve Bank. “We decided even during the periods where the economy was doing the poorest, and we were pretty far away from our objectives not to move to negative interest rates because of some concern that the costs might outweigh the benefits. That said, some of the experiences in Europe suggest that maybe you can use negative interest rates and the costs aren’t as great as you would anticipate.”
Dudley added that with a tightening labor market negative interest rates were not called for at this time “in light of all the information we receive,” but what if we’re not receiving all the information we need or are reading it incorrectly?
Gallup’s U.S. Economic Confidence Index for the second week of October was “steady at -12.” Just how great can the labor market be if the confidence index is so low? A just-published study by Bank of America-USA Today finds that 31 percent of millennials worry about the possibility of a job loss.
“Median earnings growth and household spending growth expectations decreased sharply from the prior month,” said the Fed in its September Survey of Consumer Expectations. “Median expected spending growth is more than a percentage point below its June 2015 level and has reached a new series low.”
What about home prices? According to the National Association of Realtors, existing home prices in August were up 4.7 percent when compared with a year earlier and there’s no doubt that equity has grown: the Federal Reserve says real estate wealth has increased by almost $2 trillion since 2012. That said, such figures hide a very different reality for millions of homeowners. According to Weiss Residential Research, 23.4 percent of all homes now show lower prices.
Wages are surely a crucial measure and yet incomes remain lower than in 1999. If there’s an economic rebound then most households are not seeing it.
The ‘Sharing’ Economy
Assessing the labor situation with the usual models may no longer work because we increasingly have a “sharing” economy, a polite term meaning that employees get no benefits and work only when needed by employers.
“About 10 percent of the workforce is assigned to irregular and on-call work shift times and this figure is likely low,” according to the Economic Policy Institute. “Add to this the roughly 7 percent of the employed who work split or rotating shifts and there are about 17 percent of the workforce with unstable work shift schedules.”
The attraction of this system is that workers have Uber-like flexibility, but that’s only in the best situations.
Many workers in the new economy, says EPI, can be “scheduled for fewer hours, days, or weeks than they prefer to be working, the daily timing of their work schedules can often be irregular or unpredictable. This both constrains consumer spending and complicates the daily work lives of such workers, particularly those navigating through non-work responsibilities such as caregiving. This variability of work hours contributes to income instability and thus, adversely affects not only household consumption but general macroeconomic performance.”
The Benefits of Negative Interest
While negative interest sounds hideous, as is usually the case there are both winners and losers. The losers include those who not unreasonably want better returns from their capital such as retirees, those with savings, banks, insurance companies, and pensions. On the other hand, the winners include anyone with debt or who needs capital. Think, for example, of the rush to refinance in a world with negative interest, the additional disposable income available to borrowers, increased consumer spending and lower government costs to finance the deficit.
Could we see negative interest rates?
It’s no longer unthinkable — and that’s something to think about.