IN THIS ISSUE:

1. Fed Moves Aggressively to Rescue Economy

2. What Are Negative Interest Rates?

3. Negative Interest Rates in Japan & Europe

4. Are Negative Interest Rates Coming to the US?

5. How Negative Interest Rates Would Affect You

Overview

There is a growing debate in financial circles over whether the US Federal Reserve should move to a negative interest rate policy in an effort to stimulate the economy during the coronavirus crisis. Even President Trump has said more than once in recent weeks that he favors negative interest rates and considers them a “gift.”

Yet Federal Reserve Chairman Jerome Powell has recently said that he and his fellow members on the Fed Open Market Committee do not believe negative rates are a good idea for the US. He made it clear the FOMC has no plans to pursue such a policy, despite the fact that Japan and much of Europe have had negative interest rates for several years (with questionable results).

Given that the debate over negative interest rates is intensifying, I thought this would be a good time to discuss the pros and cons and why I tend to agree with Chairman Powell and not President Trump. This should be interesting.

Fed Moves Aggressively to Rescue Economy

Most forecasters agree the US economy is now in a severe recession, perhaps the worst since the Great Depression. In response, the Federal Reserve has taken unprecedented measures to help it survive the consequences of the COVID-19 pandemic.

The Fed effectively cut short-term interest rates to zero (00.0%-0.25%) in March. It has since injected $2.5-$3 trillion into the economy through emergency initiatives such as buying municipal bonds and lending money to small and mid-size businesses that don’t qualify for Small Business Administration emergency loans. It’s even buying corporate bond ETFs.

These measures show the Fed is doing everything in its power to prop-up the economy. Until now, the Fed had never utilized its authority to purchase municipal bonds or ETFs. But it remains to be seen if these unprecedented policies will be enough. As a result, discussions about negative interest rates, a controversial monetary policy tool, are growing rapidly.