An Urban's Rural View

The Negatives in Negative Interest Rates

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Denmark does it. So do Sweden, Switzerland, the European Union and Japan. Countries producing a fifth of the world's economic output now have negative interest rates, meaning their central banks charge banks for keeping money on deposit with them.

Might the U.S. join the negative-rate ranks? On February 11 Federal Reserve Board Chairwoman Janet Yellen told Congress the Fed is studying negative interest rates and would be prepared to use them if the U.S. central bank thought they were needed to stimulate the economy.

Just two months ago, you may recall, the Fed had raised rates for the first time in nine years, expressing optimism about the economy. This was supposed to be a turning point, the beginning of a gradual return of monetary policy to something resembling normal, the end of the extraordinary measures the Fed had taken and extended in the wake of the 2008 financial crisis (…). How could the Fed now be talking about going negative?

When a toddler has a temper tantrum and responds to comforting by screeching louder and longer, mom and dad sometimes get rattled. The Fed, it is fair to say, was unnerved by the hissy fit markets threw in the wake of its rate hike. Prices of equities and oil fell and fell some more. Investors seemed more pessimistic than the Fed about the prospects for economic growth.

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Business borrowers, including farmers, like low rates and will be tempted to thank the markets for making the Fed question its rate-hike decision. They should understand, though, that questioning the decision and reversing it are two different things. Despite the doubts the last two months of market moves have raised, the Fed is unlikely to return U.S. rates to near zero soon, much less take them negative.

Here are four reasons why:

-- While economies overseas remain in a funk, the U.S. economy continues to advance, albeit slowly. The 60 economists The Wall Street Journal surveys forecast first-quarter GDP growth of 2%, up from 0.7% in last year's fourth quarter (…). They see the economy growing 2.4% in the second and third quarters. Faster growth would be better, but the situation is not desperate. Negative interest rates are a desperation play.

-- Markets may not share the Fed's optimism, but they don't welcome the smell of desperation. When the Bank of Japan introduced negative interest rates in late January, the Tokyo stock market tumbled. As foreign investors pulled out they covered their short-yen positions, which pushed the yen up against the dollar, exactly the opposite of what the central bank wanted. Two weeks later, Sweden also saw its currency strengthen when it pushed its interest rates deeper into negative territory.

-- If the Fed tried to charge banks for their deposits, the banks might well sue, and there's at least an outside chance they'd win (…). They'd have reason to sue: Negative rates would hurt their profits. Most banks would swallow the charge rather than risk trying to pass it on to customers by charging for savings accounts. Even if the Fed won the lawsuit, it would face political heat. Congressional Republicans reacted negatively to Yellen's testimony on negative rates.

-- While Yellen did refuse to take negative interest rates off the table, her comments should be taken in context. During two days of Congressional testimony, she also said she didn't see the economy worsening soon to the point where the Fed would need to lower rates again (…). By leaving open the possibility, the Fed is trying to tell the markets that it has bullets left in its monetary-policy gun. It isn't threatening to shoot them.

Urban Lehner can be reached at


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