Federal Reserve ponders negative interest rates.

The Federal Reserve Board is reportedly thinking about negative interest rates as a means of stimulating the economy.

“Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate,” said William Dudley, the president of the New York Fed, in an interview on CNBC on Friday.

Source: MarketWatch

Negative interest rates are just what they sound like.   Depositors would pay banks to keep their money rather than being paid interest.  This is crazy.  Why would the Federal Reserve Board members even consider such a thing?

The idea is that if our economic problem is too much saving and too little spending, you can stimulate spending by penalizing saving.

The idea is that if low interest rates stimulate spending and investment, which produce economic growth, then negative interest rates would be an even better stimulus.

The negative interest rates would apply to funds that individual banks, such as M&T Bank here in upstate New York, deposit with a central bank, such as the Federal Reserve Bank of New York.

The negative rate wouldn’t necessarily apply to individual depositors, although it might.  Central banks in Germany, Switzerland, Denmark and Sweden have imposed negative interest rates, and individual banks have charged depositors for holding their money.

In these circumstances, a rational person would save their money in the form of currency or coins, or tangible property such as real estate or gold.  But governments are trying to discourage people from holding large amounts or making large purchases in cash.

This leaves people who don’t want to see the value of their savings erode in a bind.  They have little choice but to invest in stocks and bonds and risk the fluctuations of the financial markets—which is what the Federal Reserve Board and other central bankers want.

A stimulus does not make an individual or an economy stronger.  An economic stimulus does for the economy what a cup of strong coffee does for the human body.   If the body is exhausted or undernourished, stimulus will not keep it going forever.

The fact that the Federal Reserve Board and European central banks are considering such a crazy idea signifies that they have run out of good ideas.

LINK

Fed officials seem ready to deploy negative rates in next crisis by Greg Robb for MarketWatch.

How Will Negative Interest Rates Change the Rules of the Game? by John Rubino for CFA Institute magazine (via Enterprising Investor).

Less Than Zero: When Interest Rates Go Negative by Jane Randow for Bloomberg Business News.

Tags: Federal Reserve Board, Negative Interest Rates