Where is the bottom for interest rates? Could it be below zero?
During her recent congressional testimony, Federal Reserve Board Chair Janet Yellen told lawmakers that she wouldn’t completely rule out the notion of negative interest rates.
Negative rates began in Europe and were recently put into place in Japan, in response to non-existent economic growth. What does this mean exactly? Instead of being paid for parking their excess reserves at the central bank, the banks must pay for the privilege.
The thinking goes that negative interest rates should encourage banks to lend or buy alternative assets that can provide a boost to growth. But the strategy also is seen as raising the risks of financial instability.
Prospects for negative rates here
Don’t bet on negative rates in the U.S. just yet. Not only are they controversial and untested, but the Federal Reserve still has an inclination toward raising — not lowering — interest rates.
Bottom line: Whether rates can, or should, head into a realm below zero has yet to be decided.
