What Would Negative Interest Rates Mean For Your Savings?

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Includes: RINF
by: Don't Quit Your Day Job

In short: nothing good. Especially, nominally.

Although overnight negative interest rates don't necessarily mean that your savings account is going to slowly tick negative, soon after a negative interest rate policy is implemented it's possible that some banks will do the unthinkable: Take money from you (other than fees) to hold your money for you.

What Are Negative Interest Policies?

At first, negative interest policies were a theoretical idea. Conceptually, the central bank (or a large, safe private bank) can hold excess reserves for other banks and charge them a nominal amount for the privilege - so The Bank of DQYDJ could have $1,000,000 in excess reserves with the Federal Reserve at, say, -1%. The Bank of DQYDJ would pay this because the cost of holding funds - either in security, space/real estate costs, insurance cost, losses to disasters, or whatever - was greater than the cost of letting the Federal Reserve deal with all of the risks. (A similar argument applies to why stores will pay large interchange fees to credit card processors when customers can also pay cash - cash is not really 'free' to use).

These policies were theorized to work in deflationary environments - if inflation was a negative 1%, then losing 1% on reserves is the same as breaking even.

Of course, we're ignoring a huge factor - customers.

In an era of negative interest rates on your savings account, withdrawing money and putting it in a hole in your backyard or under your mattress would mean you're doing better than the rates you'd be getting at the bank. Of course, the same arguments apply as in the case of the bank - and there's no FDIC insurance if money is missing from under your foam mattress topper. That means that in some conditions you would accept negative rates - perhaps in an era of deflation and with increased property crime due to more people hoarding money at home.

All of those theoreticals aside, Negative Interest Rate Policies are now actual policy in many large economies - including in Japan, the Eurozone and Switzerland. This hasn't trickled down to customer savings accounts in too many instances yet, but some small banks have already started to pass along costs. In many cases, banks can use increased/more strict fees to 'effectively' charge depositors on a whole, collecting more in fees and charges than they pay out in total interest to their customers.

Could It Happen in the United States?

18 months ago there were zero government bonds with negative rates. We're up to somewhere north of $6 Trillion in bonds priced with negative interest.

Although none of those bonds are American at this point, it would be crazy to dismiss the possibility out of hand.

The Federal Reserve agrees - they have discussed stress testing the US banking system in an environment where 3 month Treasuries went to -.5% and stayed there for years. Federal Reserve Chair Janet Yellen appeared in Congress recently as well, testifying that Negative Interest Rates weren't currently planned but are not "off the table".

Note, too, that the United States has positive inflation - at least, year over year. Any time rates are below the realized rate of inflation, it is technically 'negative' - which is why countries target positive inflation in order to give themselves room to maneuver without hitting this theoretical "zero rate bound". If the United States could juice inflation to 3%, then a Federal Funds Rate of .25% would effectively be -2.75%… which would also affect savings behavior by causing allocations to move away from cash.

So, yes, what was once a theoretical could happen in the United States. On a nominal level. Especially, if inflation doesn't increase.

Oh, and a lot of this debate played out before the most recent inflation readings, which were relatively upbeat. That means while negative rates might still happen, their possible introduction was just pushed a little further down the road.

What Can I Do to Avoid Negative Interest Rates?

For now? Nothing.

If negative rates are coming, there are things you can do before risking a break-in by storing lots of cash at home:

  • Prepay large bills (such as the mortgage)
  • Double down on paying off debts (such as credit cards and… the mortgage)
  • Increase your risk tolerance by moving to non-savings and checking account instruments
    • Money markets
    • US Treasuries (longer duration)
    • Overnight paper

The third one can be a tough pill to swallow, especially for older savers - not having positive (or even flat) bank accounts would undoubtedly be a huge burden for the older generations. We've made the argument in the past that policies like this are effectively 'stealing' (we write that tongue in cheek, mind you).

However, that's the environment we currently inhabit - and Negative Interest Rates should be on the table as a policy option, politics aside. I'd go further and say that extended negative rate periods might become just another tool in monetary policy, as they seem to (again, only 18 months of data) have more predictable effects than alternatives like QE.

Good luck out there!