Negative Interest Rates – Are They Possible Here?


Kevin Gale, Managing Director, Head of Fixed Income

Europe and other parts of the world have seen negative interest rates since at least 2014. During that time period, areas of the world that have had negative interest rates (the Eurozone, Japan, Sweden, Denmark, Germany) have not experienced either widespread growth or inflation in response to this policy decision. This makes it unclear as to how much economic benefit negative interest rates deliver. In fact, some would argue that negative rates may do more harm than good as it signals an uncertainty about the future and can lead to capital flight.

With the recent turmoil in the U.S. caused by COVID-19, investors are contemplating if the Federal Reserve will take interest rates negative soon. The Federal Reserve, on the other hand, has said not so fast. In recent days, several members of the Federal Open Market Committee (FOMC), including Chairman Jay Powell, have said they have no expectations of taking rates negative. Of course, this assumes economic conditions do not significantly worsen.

Should the FOMC take rates negative, the implications in the U.S. are still unclear. If we use Europe as a guide to what happens when rates go negative, the implications appear to be minimal. In the U.S., the biggest concerns would be how banks and individuals react to negative interest rates. If individuals are being charged to have a savings account at a bank, would they withdrawal their money resulting in a run on bank deposits? Would banks do the same thing and withdraw the deposits they have at the Fed? If we look to Europe, surprisingly neither one of these has happened, which makes it possible for rates to go negative in the U.S. without a severe impact on liquidity and the banking system.

While the FOMC has said it has no intentions of taking rates negative, it does not mean the market will not do it for them. Treasury bond yields are at or near all-time low yields with parts of the yield curve near 0%, meaning we potentially could see negative interest rates driven by the market itself.

Either way, low interest rates certainly appear to be here for the foreseeable future.

View All >