Personal Finance

Will the federal reserve go to negative interest rates?

  • Last Updated:
  • May 9th, 2020 6:50 pm

Poll: Will the federal reserve go to negative interest rates?

  • Total votes: 37. You have voted on this poll.
Yes
 
9
24%
No
 
19
51%
Maybe
 
2
5%
I don't know
 
7
19%

Poll ended at Nov 4th, 2020 6:15 pm

[OP]
Sr. Member
Feb 14, 2010
544 posts
472 upvotes
Toronto

Will the federal reserve go to negative interest rates?

So the market is currently suggesting the federal reserve will go to negative interest rates.
Will someone on the other said of the boat argue why the fed will/can never go to negative rates.
6 replies
Deal Addict
Jan 2, 2015
1570 posts
556 upvotes
Toronto, ON
I don't think that will happen. It's almost a conspiracy theory: "The Gubbamint Will Steal Your Moolah!" People are hoarding dollars the way they do toilet paper right now because they don't know what the uncertain future will hold. (There's less hoarding going on as the situation gradually improves.) If worst comes to worst, expect to see more panic-buying of N97 masks.

We have ultra-low interest rates right now. You still have to pay interest on credit cards, mortgages, and other kinds of loans, just less. Right now online banks are offering far in excess of 0.25% interest as well. The nightmare scenario that your savings accounts will start shrinking simply isn't going to happen.

At least the current ultra-low interest rates are helping struggling businesses (a little). We want as many as possible to survive and continuing employing people once things return to normal.
Deal Addict
Sep 11, 2006
1743 posts
552 upvotes
Who knows, no one a month ago would've thought people would pay you to take delivery of their oil either.
Sr. Member
Oct 17, 2008
580 posts
137 upvotes
Earth
their spending are never 100% transparent...:rolleyes:
Deal Addict
Jan 2, 2015
1570 posts
556 upvotes
Toronto, ON
Shadow Rider wrote: Who knows, no one a month ago would've thought people would pay you to take delivery of their oil either.
Oil was never in the negative. Oil futures were in the negative. This isn't something that affects the vast majority of the population, but of course it sucks for the oil & gas industry.
Newbie
Mar 13, 2020
19 posts
8 upvotes
The U.S. has been in a 'negative real interest rate' era several times since the 1940's making it unnecessary for the funds rate to actually be negative 'ie. negative interest rate' and is part of Economic Theory and paying down debt:

Negative real interest rates

"The real interest rate solved from the Fisher equation is

1 + i 1 + π − 1 = r {\displaystyle {\frac {1+i}{1+\pi }}-1=r} {\frac {1+i}{1+\pi }}-1=r

If there is a negative real interest rate, it means that the inflation rate is greater than the nominal interest rate. If the Federal funds rate is 2% and the inflation rate is 10%, then the borrower would gain 7.27% of every dollar borrowed per year.

1 + 0.02 1 + 0.1 − 1 = − 0.0727 {\displaystyle {\frac {1+0.02}{1+0.1}}-1=-0.0727} {\frac {1+0.02}{1+0.1}}-1=-0.0727

Negative real interest rates
are an important factor in government fiscal policy.

Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt, meaning the inflation rate is greater than the interest rate paid on the debt. Such low rates, outpaced by the inflation rate, occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, pensions, or bond, money market, and balanced mutual funds are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk.

Lawrence Summers stated that at such low rates, government debt borrowing saves taxpayer money, and improves creditworthiness.

In the late 1940s through the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay so low.

Between 1946 and 1974, the US debt-to-GDP ratio fell from 121% to 32% even though there were surpluses in only eight of those years which were much smaller than the deficits."
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