The pros and cons of charging negative interest rates, and what they could mean for you


After going more than a decade without a single interest rate cut, recently the Federal Reserve shifted gears and has lowered interest rates twice since July. The Fed's change of heart comes as the global economy is looking weaker, and many experts are forecasting a recession.

The Fed hopes that lowering interest rates will help keep the economy growing for the time being, but there's only so low that rates can go — unless they go negative, which has never happened in the United States. Negative interest rates would upend the traditional financial system in that savers would effectively pay banks to store their money while borrowers could be paid to take out loans.

Some U.S. politicians, including President Trump, have called for them to be implemented, which puts pressure on the Fed. Currently, the U.S. central bank has set the benchmark interest rate at a range of 1.75%-2%. That's down half a percent from earlier this year, as the Fed has cut rates by 25 basis points twice since July.

For rates to go negative, they'd need to drop by more than 2%.

Negative interest rates would turn things upside down

Interest rates dictate how much you pay to borrow money, whether from a credit card company or a mortgage provider. They also determine how much a bank pays you to store your money with them.

That number is, and almost always has been, positive or neutral. That means you pay interest on your credit card balance so that the issuer makes money, and your bank pays you to maintain a savings account, rather than you paying them.

How do economic cycles work?

Negative interest rates would flip the script. In theory, if rates went negative, you'd pay your bank to keep your money, and a credit card company would pay you to spend.

And that's the idea: to get consumers to spend money rather than save it. Spending and consumption is the product of demand, and demand for goods and services creates jobs. So enticing Americans to spend more would keep the economy growing.

What negative rates could mean for you

Experts aren't exactly sure what the effects would be if the Fed cut rates below zero, as it's never happened before in the U.S. They can make some educated guesses, though.

For savers, negative rates could be disastrous. You'd be losing money by stashing it in a savings account and would likely be better off hoarding cash under your floorboards.

"Cutting interest rates to zero would throw savers under the bus," Greg McBride, the chief financial analyst at Bankrate, recently told CNBC. "Zero percent interest rates are not a panacea," he added, explaining that sub-zero rates likely wouldn't have the desired effect of getting people to spend.

It would also set you back on retirement savings, says Robin Anderson, a senior global economist at Principal. "The challenge of negative interest rates is that you may actually have to save more because you might see negative yields on some of your investments," she says. "You'd have to save more to achieve the same retirement goals."

The challenge of negative interest rates is that you may actually have to save more because you might see negative yields on some of your investments.
Robin Anderson
Senior global economist, Principal

On the other hand, people who are looking to borrow money to buy a house or a new car, or to finance their education, could come out ahead.

Experts say it's unlikely, though, that any lenders would actually pay consumers to take on debt. Instead, they'd find other ways to make money. "I ultimately think that consumers will pay more in the form of higher fees," Anderson says.

Could negative rates come to the US?

Several countries currently have negative interest rates, like Japan, Switzerland, and Sweden. But Fed chairman Jerome Powell has repeatedly said that he wants to avoid sub-zero rates. "I do not think we'd be looking at using negative rates," Powell told reporters following a recent Fed meeting.

He has good cause for concern. Research shows that negative rates in Europe and Japan may be backfiring, hurting bank profits and affecting banks' ability to offer loans.

The likelihood of the U.S. implementing negative rates depends on what the economy does. As of August, data showed that 74% of economists predicted the U.S. would experience a recession by 2021. If we are going to see negative rates, it would likely be within the next couple of years as the Fed works to keep the economy healthy.

Despite Powell's resistance, some CEOs and economists are either saying it's possible we'll see negative rates or preparing for them by cutting costs and looking at potential fee increases.

For consumers, the best preparation is to stick to basic, healthy financial habits. Namely, build your savings, be mindful when spending, and keep your long-term goals in mind. Negative rates may or may not become a reality, and you shouldn't start making bad decisions while getting your hopes up that your credit card issuer will bail you out.

"For consumers, let's get one thing straight about negative interest rates — no one is going to pay you to take out a loan," McBride told NBC News.

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