Janet Yellen, chair of the Federal Reserve’s Board of Governors, recently commented on the possibility of negative interest rates occurring in the United States. Could this happen — and, if so, should we look forward to it? NC State University economist Mike Walden answers.
“Well, in my almost 40 years as a professional economist, this is the first time I have heard a serious discussion of negative interest rates in our country. So really this is a first for the U.S.
“And in her recent testimony, Chair Yellen said that negative interest rates in the U.S. were possible but, she said, not probable.
“Now where this is coming from is the fact that, if you look around the world, there are several countries — Japan, Switzerland, Denmark — that have actually installed, if you will, or where we see negative interest rates.
“And what a negative interest rate simply means is, if you go to the bank to deposit your money now, you’ll actually be paid interest. That’s an encouragement for you to deposit your money with the bank or a saving institution. If you have negative interest rates, you’d actually pay them to hold your money.
“So it would discourage people from saving, and the theory is that it would actually, therefore, encourage people to spend. So it’s a tactic that countries use as a last resort to try to encourage spending if their economy is not doing well.
“Now there is a big downside, and that is, it hurts the banks. So bank profitability would go way down, and you may have another problem, if we had negative interest rates, with bank’s surviving.
“It also, I think, sends off a message to the world and to consumers that, ‘Hey, things are really bad here,’ because negative interest rates is something you don’t typically see.
“So I don’t think this is something that we want to hope for, and I actually don’t think it will come to this in the U.S., but it is a topic now that we are hearing more about.”