The good, bad and ugly of negative interest rates

Green symbol percent

The New York Times recently published a great explainer piece on negative interest rates in Europe and Asia, “In the Bizarro World of Negative Interest Rates, Saving Will Cost You.” Essentially, rates have gone negative in certain countries in order to stimulate struggling economies.

However, in our view these negative interest rates will likely have unintended consequences and implications. Currently, 10 developed countries have negative interest rates and there is talk of them going even lower.

Consider these negative implications:

  • Banks will have to pay for their deposits at Central Banks
  • Insurance companies will not be able to match their liabilities
  • Pension funds will not be able to meet their required return levels
  • Investors will receive less return or will leave the market altogether
  • Everyday investors, savers and citizens will have to pay to have a financial institution hold their money

The winners of negative rates are the governments who issue debt, as they now get paid to issue more debt. National debt services can be greatly reduced as interest expense on debt is not a factor. In fact, debt should go even higher as governments are now incentivized to issue more debt because they get paid to do so.

The good news? We don’t believe that negative rates will happen in the United States. Negative rates would not accomplish much here and may actually work in the exact opposite direction than the stated intention. By going negative, the Federal Reserve would basically be admitting that they don’t have any other options and things are worse than advertised.

Economic numbers have been coming in better than expected in the U.S. with the most notable monthly payroll figures showing positive gains. Payrolls have been better than expected and unemployment stayed at 4.9 percent in February. Although these numbers are positive, they alone will probably not be enough for the Fed to raise rates again in March. They will however start to pave the way for another hike in the summer…