Negative interest rates and your money

Receiving interest when depositing money in banks used to be a given. But what if the Fed starts using negative interest rates – as in, below zero – in the United States? Crazy as it might sound, you would have to pay your bank to hold your savings.

Janet Yellen, the Chairman of the Federal Reserve’s Board of Governors, said in her February testimony on Capitol Hill that she “would not completely rule out the use of negative interest rates in some future very adverse scenario.”

Yellen believes our economy will strengthen with gradually rising interest rates, though. But when pressed, Yellen admitted she’d at least consider using negative interest rates if the economy worsens.

The European Central Bank, beginning in 2014, and Japan, well before that, used negative interest rates to stimulate growth and support their economies. Switzerland started using negative rates in December 2014.

Many on Wall Street think negative rates are unlikely, but others, including myself, think they might be on the way. When Europe experienced inflation falling below two percent, high unemployment and sluggish growth, the European Central Bank – already paying nothing on deposits – found the only way to stimulate the economy was to cut interest rates below zero.

A major economic disaster such as a 1987-type market crash or a faulty market read by our next president could pave the way to negative interest rates in the U.S. If our next president inadvertently spooks the market by trying to negotiate debt down 20 percent, negative rates could happen here, too.

Logically, negative rates encourage banks to lend money rather than pile it into reserves. This motivates people to spend, rather than save, to stimulate the economy. We’ve had artificially low rates for more than seven years now so the Fed, in my opinion, doesn’t have a lot of strategies left.

Denmark tried building support for its currency with negative rates between July 2012 and April 2014. Sweden used negative rates, too.

A criticism of negative rates is that they reduce bank profitability and, ironically, this often increases market instability. So banks with financial challenges could be hit hard.

What does this mean for you? Banks likely will escalate the fees you pay for loans and mortgages. Bank services wouldn’t be provided at low costs or no cost. For example, if you have $5,000 in a savings account and a bank charges you a $25 fee, you're really getting hit with a negative-.50 percent rate of interest.

Traditionally the U.S. economy, and U.S. bonds in particular, are believed to be among the safest and best places for international investors to park their money. So if you end up paying to keep your money at a bank because of negative rates, consider this as an insurance premium for maintaining security for your cash.

OK, I know what you’re thinking. With negative interest rates, “I’ll just put my money under the mattress or in a safe deposit box.” That's not good or practical.

Get used to the possibility of negative interest rates. Soon you may have to start paying the bank to hold your money. You’ll do so because things might get worse.

This story was originally published September 12, 2016 at 10:26 AM with the headline "Negative interest rates and your money."