During the 2020 Berkshire Hathaway Annual Shareholders Meeting the topic of negative interest rates came up. In Warren Buffett fashion, Buffett says negative interest rates could have extreme consequences.
St. Louis Fed President James Bullard agrees with Buffett and thinks negative interest rates would be problematic because of the short term funding markets / the money markets. In addition, he is unclear if negative interest rates have actually helped the Bank of Japan and the European Central Bank.
Federal Reserve Chairman Jerome Powell on Wednesday seemed to close the door on using negative interest rates as a policy tool, even as financial markets flirt with the idea.
“The committee’s view on negative rates really has not changed. This is not something we’re looking at,” Powell said during a moderated discussion sponsored by the Peterson Institute for International Economics.
Powell said “the evidence on the effectiveness” of these experiments “is very mixed.”
“I know that there are fans of the policy, but for now it’s not something that we’re considering,” he said.
The Fed chairman said negative rates could interrupt the well-known process where banks take funds from depositors and lend them out to borrowers.
You know President Donald Trump had to get his say in the matter with his continued love-hate relationship with Fed Powell. This afternoon, Trump said he still strongly believes the Federal Reserve should have negative interest rates and he still disagrees with Powell when it comes to the lending rate set by the central bank.
So what would actually happen if the US saw negative interest rates? Well, Banks’ profits would take a massive hit, because now they would have to pay to hold deposits at the Federal level, rather than collect interest. This in turn would have negative adverse affects on the economy because they would be less likely to provide credit and loans.
Regarding the money markets, overnight banking, money-market mutual funds that buy short-term debt, creating credit liquidity for companies, banks, governments, etc. well that would probably dry up because when you include associated fees, investor might actually return a lost vs. making a small profit.
Michael Cloherty, a rates strategist at UBS said, we have a money market fund industry whose business model would come under severe strain if rates were negative.”
So how will negative interest rates affect you and me? Banks will pass on their cost now to us, so we will have to pay the banks to hold our cash. O the flip side, negative interest rates would likely result in even lower mortgage rates and credit card rates. Negative rates will also hurt the US dollar. This is probably why indirectly Trump wants negative interest rates as a weaker dollar should make our exports more competitive.
In summary, negative interest rates aren't a good thing, it means the economy stinks and contracting not growing.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advice. Do your own research before making investment decisions.