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.