Government

A keen interest in interest rates – think of the long-term consequences

Staying Positive Adam M. Grossman  |  September 22, 2019

PRESIDENT TRUMP recently criticized the Federal Reserve—yet again. Calling Fed Chair Jerome Powell and his colleagues “boneheads,” the president expressed frustration that they haven’t done more to lower interest rates. Specifically, the president said we should, “get our interest rates down to ZERO, or less.” That last part—“or less”—was key. Not only should rates be lower, he argued, but they should be below zero, as they have been in Europe.

Last week, the Fed did indeed cut short-term interest rates—by 0.25 percentage point. Still, so far, the Fed has resisted pressure from the White House and is holding its target interest rate well above zero. I hope they continue to do so. While I understand the president’s perspective—as a borrower, the Federal government would benefit from lower rates—I see at least 10 ways that negative rates would hurt our economy and investors over the long term.

1. Low rates punish retirees. Consider what life looks like today for a retiree in Europe. In Germany, 10-year government bonds are now paying –0.5%. Translation: Instead of earning interest when you buy a bond, you have to pay the government to take your money. It’s completely upside down.

2. Excessively low rates cause investors to reach for yield. With rates on high-quality government and corporate bonds providing paltry income, many people throw caution aside and purchase lower-quality bonds. Why? Because that’s the only way to earn a higher rate. But this is dangerous. Low-rated bonds carry low ratings for a reason: They’re riskier. If U.S. rates went negative, the result would be even more investors facing this uncomfortable choice.

Source: Staying Positive – HumbleDollar

I urge you to read the full list of ten concerns about ultra low interest rates on HumbleDollar at the link above.

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4 replies »

  1. Check this out… if US interest rates go negative… economists at the IMF are already discussing plans to reduce the value of your cash so there will be no runs on the banks! See Feb 2019 Bloomberg article at link below:

    ” The key is the conversion rate since that would let cash depreciate at the same pace as the negative interest rate on e-money. Shops would also start advertising prices in e-money and cash separately. ”

    https://www.bloomberg.com/news/articles/2019-02-06/imf-staff-floats-dual-money-to-allow-much-deeper-negative-rates

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  2. By promoting zero and even negative interest rates, Trump is hurting savers… and especially seniors and pension plans.

    I had a bank CD come due this month. Fortunately, I was able to get a 5 year CD at 3.25% at Navy Federal Credit Union. Navy Federal is the largest US credit union. Anyone with a close relative either currently in any branch of the military/reserves or close relative of a veteran can join. See its website for more membership and interest rate info.

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  3. I totally agree that zero interest rates are very bad. #10 on that list fails to mention that as banks lower their lending rates to be competitive, they raise their fees and minimum deposit requirements. Also why should people deposit money into a bank that pays no interest?

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