Learn how the potential of negative interest rates in the U.S. would impact your finances.
Some countries such as Switzerland, Sweden, Japan, and Europe have negative interest rates, and people are not happy about it. The rate of interest is what the bank pays on your deposits, but when it goes to the negative you are paying the bank to hold your deposits.
On Wednesday it was announced that the Fed’s Open Market Committee voted to cut the current interest rate by 25 basis points to a range of 1.75% to 2%.
What Do Negative Interest Rates Mean for You?
The most obvious result of the current rate cut is that your bank will be paying you a lower rate of interest on your deposits.
Will they cut the current interest rate again? What should you do? Should you do anything?
The philosophy behind negative interest rates is to encourage consumers to spend more and banks to lend more. The thought is that if it costs a bank to hold your money, they would rather lend it and earn some interest. On the other side, the idea is that consumers will choose to borrow money and spend it.
Will the U.S. see negative interest rates? With the current interest rate now at 1.75% to 2%, there is not much more to cut before the mark hits zero.
Some analysts believe negative rates in the United States are possible. Following the financial crisis, the official rate was cut to almost zero. That cut resulted in the purchase of trillions of dollars of bonds by the U.S. central bank.
The purpose was to provide stimulus to the economy. According to some analysts, it may be necessary for the Fed to cut rates below zero. Bank of America analysts reports that investors believe that “low but increasing odds the Fed will need to take rates to zero or potentially negative.”
A number of top economists believe this will happen including former Fed Chairman Alan Greenspan stated in a CNBC interview that “it’s only a matter of time” before U.S. Treasuries trade at negative rates.
Ten years ago the possibility of negative interest rates was no more than a random conversation among analysts, but two years ago some small countries started taking the step.
Today it is the policy of the European Central Bank and the Bank of Japan. Sweden’s central bank has now lowered its bank lending rate from a 0.3% to a 0.5%.
Janet Yellen, the U.S. Federal Reserve chairwoman has stated the American Central Bank was evaluating the strategy, but she also stated there was no movement in that direction.
How to Handle Lowering Interest Rates
If the U.S. Federal Reserve continues to gradually cut interest rates, don’t panic and start pulling your money from the market or change your retirement planning.
There was no clarification on whether or not rates will be cut again this year, and that added to the volatility of the market which is already jumpy with a trade dispute between Washington and Beijing.
Consider certificates of deposit for the money you are saving. Although their interest rates have been dropping and you won’t earn as large a return, it is a guaranteed rate of interest.
If there is a recession, your money can ride it out with the rate you get into today. If there is a recession, you don’t want your money to be in a high-yield money-market or savings account.
Their yields are not guaranteed as the CD is. Find a rate as high as you can for the longest term (3 or 5 years), and your rate is guaranteed for that time period.
Paying attention to what the Fed is doing is important. You want to protect your money and investments for your future. Doing nothing is frequently the wrong approach. Look for options that will allow your money to keep earning.
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