An Urban's Rural View

Some Negative Thoughts About Negative Interest Rates

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Imagine you're negotiating for a loan and when you ask how much you'll pay in interest, the banker dumbfounds you with this answer: "Actually, it's we who will be paying interest to you."

Can't stretch your imagination that far? Wondering what the writer of that paragraph has been smoking? Well, look, I'm not saying this scenario will definitely play out for you. But it is more than just a theoretical possibility.

Negative interest rates, as they're called, are already a reality in some parts of the world. Central banks in Denmark, Japan and the European Union have adopted them, and something like $16 trillion of negative-yield bonds have been issued. (…) If you buy one of these bonds and hold it to maturity, you will end up with less money than you invested.

If you think that sounds crazy, I won't disagree with you. I can explain why it's happening and I can assess the chances of it coming to the U.S.—that's what this post is about. But like you, I have to suspend disbelief to even discuss the subject.

To understand negative rates, start with this sad fact: The world has still not fully recovered from the 2008 financial crisis. Developed-country economies are still not posting strong, consistent growth. Deflation is still as much a concern in some developed countries as inflation.

In response to this sluggishness, central banks have had to resort to some unusual tools. They've bought massive amounts of debt securities, a tactic known as "quantitative easing." They've kept interest rates at historically low levels. And in some parts of the world, they've gone further and taken rates into negative territory.

In the U.S., whose economy has recently enjoyed stronger growth than Europe or Japan, the Federal Reserve has decided against negative rates. But now President Trump is urging the Fed to adopt them. "The Federal Reserve should get our rates down to ZERO, or less," he tweeted on Sept. 11.

A few days later, Fed Chairman Jerome Powell spoke out strongly against negative rates. Powell has become something of a Trump punching bag, but at the central bank's post-meeting press conference he punched back.

Were the economy to weaken to the point of needing aggressive Fed action, Powell said the Fed was more likely to use "large scale asset purchases [quantitative easing] and forward guidance," as it did after the financial crisis. "I do not think we'd be looking at using negative rates," he said. I just don't think those will be at the top of our list." (…)

While Powell didn't explain why he was so negative on negative rates, their critics say they haven't been a catalyst for strong growth where they've been tried. (…).

It can take time before average borrowers feel the full benefit of a central-bank move into negative territory. According to MarketWatch, "Denmark's central bank lowered its policy rate to 0% in mid-2012. While certificates of deposit began carrying negative yields shortly thereafter, it's taken around 7 years for those rates to crop up in the mortgage market, said Danielle Hale, chief economist at" (…). You have to wonder how long it would take for negative rates to show up in farm loans.

Meanwhile, pity the poor savers. A savings deposit is essentially a loan to the bank. If, instead of earning interest, savers must pay interest to the bank on their deposits, many will find riskier places for their savings, like under their mattresses. Retired people who ought to have at least some bonds in their portfolios would be discouraged from holding them.

And let's not even talk about the havoc negative rates would wreak on banks.

Are there any circumstances under which the Fed would take interest rates down into to negative territory? I can only imagine two. One is if the U.S. economy tanks and the Fed's other tools, including quantitative easing, fail to revive it. Having run out of other ways to stimulate the economy, the Fed might throw a Hail Mary pass and go negative.

The other has less to do with economics than politics. If Trump is re-elected, he would presumably replace Powell when his term expires in 2022 with someone who is more positive about negative rates. He would then focus his scathing tweets on the holdouts among the other Fed officials who vote on interest-rate policy. It's possible, though far from guaranteed, that he'd prevail.

So if, back in paragraph two, you couldn't imagine getting paid for borrowing money, don't feel like your imagination is deficient. Negative rates aren't likely to come to the U.S.

But they could. Given how little they've helped the Europeans and Japanese, how slow they'd likely be to work their way into farm loans and the quandary they'd pose for savers, we'd probably be better off if they didn't.

Urban Lehner can be reached at



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