President Donald Trump stepped up his criticism of the Federal Reserve Wednesday, upping the ante by declaring the Fed should explore negative interest rates. Investors and economists say this could be a disaster for the U.S.
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.....— Donald J. Trump (@realDonaldTrump) September 11, 2019
....The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”— Donald J. Trump (@realDonaldTrump) September 11, 2019
The Federal Open Market Committee is expected to cut the benchmark interest rate by at least 0.25% when it concludes its meeting next Wednesday, to 1.75%-2.00%. It’s low by historical standards, but rates around the globe are lower still — and some are already in the negative.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said negative rates are far from a panacea.
“Do I think that’s the elixir for what ails us? No,” she told Yahoo Finance’s On the Move. “We’re learning that negative interest rates have not been a powerful igniter of economic growth, and I don’t think it would be any different here.”
The European Central Bank — which is set to make an interest-rate decision Thursday — has held its main refinancing rate at zero since 2016. Germany’s 10-year government bonds have had negative yields since May. Its shorter-term, two-year debt has had a below-zero yield for the past five years. It hasn’t served to boost the nation’s economy; German gross domestic product fell by 0.1% in the second quarter.
A lot of uncertainty
Sonders said that cutting rates targets the wrong problem — liquidity — instead of the real problem — the trade war.
“What ails us right now is a tremendous amount of uncertainty, a serious diminishing of animal spirits, particularly on the corporate side, a rolling-over in capital spending intentions, all tied to the trade war,” she said.
Cutting rates to zero or below would also disincentivize savers in the U.S. It would theoretically mean banks could pay zero interest on deposits — or that depositors could even pay banks for holding their money.
“As a highly-leveraged property developer, Trump is thinking about negative rates from the perspective of a borrower, but the Fed’s lukewarm appetite for negative rates is partly because officials know that it could cause outrage among savers and drag the central bank into a political maelstrom,” wrote Paul Ashworth, chief U.S. economist at Capital Economics, in a note responding to the president’s tweets.
Even the CEO of the country’s largest bank is on guard. Jamie Dimon of JPMorgan Chase said at an industry conference Tuesday that he doesn’t think rates will go negative, but the bank is prepared for the possibility.
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.