Negative Interest Rates: What This Means

My Comments: The word “interest” defines the price someone is willing to pay to use your money. In the world of economics, if the price is zero, and knowing price is a function of supply and demand, there is either no demand or the supply far exceeds the demand. Think oil prices these days.

Interest rates last peaked in 1981. Since then they have trended down to where they are now virtually zero. Common sense suggests they have to start going up sooner or later. Or maybe not.

If you have a bunch of money, and no one will pay you anything to borrow it (ie, pay you so they can loan it out, which is what your local credit union does) you either accept that it’s going to stay under your mattress, or if you want more safety, pay someone to put it under their mattress. That is what this is about.

Feb 25, 2016 by Andrea Coombs

When a central bank embraces a policy of negative rates—that is, charging banks rather than paying them to stash their reserves at the central repository—the policy can trickle down to individual savers in the form of lower interest rates on savings, higher bank fees, higher deposit requirements and other barriers to opening an account.

Thanks to weakening economies, the European Central Bank, the Bank of Japan and Sweden’s central bank, among others, have embraced negative rate policies. Generally, the aim is to push banks to lend money and thus to stimulate economic growth by encouraging businesses to invest and consumers to spend.

Those policy moves overseas prompted some questions for U.S. Federal Reserve Chairwoman Janet Yellen at a congressional hearing earlier in February. Yellen said the Fed would need to investigate the legal issues of a pushing rates into negative territory, but that she didn’t think there would be “any restriction” on doing so. Read: Yellen isn’t sure whether it’s legal to adopt negative rates.

Keep in mind that in the U.S., this is all simply talk at the moment. And even if the Fed did adopt such a policy, there would plenty of advance warning. “We’re not in that economic environment at this point,” said Greg McBride, chief financial analyst at

Even if the economy does decline precipitously, the Fed would first have to unwind the rate hike that took effect in December, he said. “This isn’t something that’s going to be sprung on us overnight.”

Still, the talk has some people worried. Ken Tumin, the Longwood, Fla.-based founder and editor of, says his readers have been reaching out to him, nervous about the implications of negative interest rates.

“My readers depend on income that they get from their savings,” he said. “It’s bad enough to make very little or zero on their savings, but the concept of penalizing them for having savings in the sense of a negative interest rate is very disturbing to them.”

In his review of bank offerings and publications in Sweden and elsewhere, Tumin says the main effect of negative rates has been on large institutional depositors, but individual savers also may see some effect from a negative interest rate policy.

“I’ve seen a case in Sweden where a bank is requiring more of a banking relationship to open a savings account,” Tumin says. “They want customers to bring over more money, open more accounts—a checking account [in addition to savings], direct deposit, things like that.”

Others agreed that negative rate policies can harm savers. “Instead of banks trying to entice us in with good service or little bonuses, they will be telling us to go away,” said Dean Baker, co-director of the Center for Economic Policy and Research in Washington, in an email.

“This will have the biggest impact on low and moderate income people, many of whom already don’t have saving/checking accounts due to the cost,” he said. “With negative interest rates, banks are likely to charge more money for these accounts, leading to a larger unbanked population.”

Plus, he said, a negative rate policy could lead to higher fees. “We are also likely to see fees attached to money market accounts and other types of short-term saving. People may still want them for their convenience, but we will be paying the banks to hold our money,” Baker said.

But there’s a bigger problem, McBride said. “The real concern about negative interest rates isn’t going to be the negative interest rates. It’s going to be the economic conditions that brought it about,” he said. For the Fed to institute such a policy, the economy would need to be in bad shape.

Worrying about negative interest rates is like “worrying about the landscaping when your house is blowing down,” he said. “We’d be worried about a shrinking economy, mounting job losses and businesses closing their doors.”

While there are worrisome signs in the U.S. economy, it’s not in the same deep hole as the economies of the countries that have instituted negative rate polices.

“The U.S. economy is in much better shape than our counterparts overseas who are having to employ negative interest rates,” McBride said. “Our economy is growing, unemployment is the lowest in nearly a decade.”

Even if the economy tanks, it’s unclear whether the Fed would adopt such a policy. “The Fed has other tools to try to boost the economy,” Baker wrote in a recent blog post.

“The obvious one is to explicitly target a long-term interest rate. For example, the Fed could say that it will push the 5-year Treasury note down to 1%. It would then buy enough 5-year notes to bring the rate down to this level,” he wrote, noting that longer term rates have “much more impact on the economy than short-term rates.”