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3 Things To Know About Negative Interest Rates

Nov. 07, 2019 1:58 PM ET3 Comments
Brian Sterz, CFA profile picture
Brian Sterz, CFA


  • Economic conditions do not immediately suggest a negative interest rate policy is around the corner, but it could still become a reality if the economy goes south.
  • The only reason negative rates are possible today is because central banks have evolved and gained significantly more control over banks and monetary policy.
  • The justification for negative interest rate policies (sometimes called NIRPs) is that they are useful to combat deflation.
  • In the event of a big downturn, there’s a chance long-term rates could ​still be driven into negative territory​ thanks to other tools, like quantitative easing, which drive up bond prices and drive down yields.

Following the Great Recession, interest rates hovered near zero for years. From 2016 to 2018, they marched slowly and steadily higher—a sign of recovery. But in the last 11 months, they have reversed course again. In September, the Federal Reserve ​slashed interest rates​ for the second time in seven weeks, continuing what’s been one of the sharpest declines in interest rates in recent history. Additionally, market probabilities imply there’s ​at least a 90% chance​ another cut is coming. Falling expectations for growth, negative interest rates in Europe and Japan, and Fed policy have all played a role in this recent downtrend.

Could interest rates in the U.S. actually fall below zero? It is often said that bond markets foreshadow what’s to come in equity markets, and about one-third of global bonds and 45 percent of non-U.S. bonds currently sport sub-zero rates. President Trump has been a vocal proponent of using negative interest rates to boost the economy, while JPMorgan Chase & Co. CEO Jamie Dimon said preparing for them represents a “normal course of risk management,” ​per NBC News​.

Yet there are greater obstacles to negative interest rates here than abroad, and Fed chairman Jerome Powell recently ​dismissed the tactic​ outright. In all, economic conditions do not immediately suggest a negative interest rate policy is around the corner, but it could still become a reality if the economy goes south. And either way, it’s good to understand the situation. Here are three things everyone should know about negative interest rates.

1. Negative interest rates are an aberration.

In the long sweep of human history, negative interest rates are extremely rare.​ ​The only reason negative rates are possible today is because central banks have evolved and gained significantly more control over banks and monetary policy. Commercial banks are required, through regulation, to hold a certain fraction

This article was written by

Brian Sterz, CFA profile picture
Brian began in the investment management industry in 2001 and has extensive experience advising institutional and high-net worth clients. As portfolio manager at Miracle Mile Advisors, Brian works with entrepreneurs experiencing liquidity events, corporate professionals and families undergoing generational transfers of wealth. He also serves on the firm’s investment committee. Prior to joining Miracle Mile Advisors, Brian founded and ran Clarity Investment Advisors, a Los Angeles based investment advisory firm. Before starting his own firm, Brian spent 7 years at EP Wealth Advisors as a member of the firm’s investment committee and investment advisor where he focused on fixed income and equity research and security selection, and led due diligence on alternative investments and overall asset allocation decisions for the firm. Brian earned his B.A. from UC Berkeley, and his MBA from UCLA Anderson School of Management. He holds the professional designation of Chartered Financial Analyst (CFA®) and remains active in the CFA® Society of LA as a panel speaker and mentor. He also holds an active life insurance license in California (CA #0L33996). Brian is actively involved with community organizations such as Back On My Feet of Los Angeles and Team-In-Training.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)

NIRP and ZIRP is proof positive that there is no "free lunch". Central Banks have provided the mechanism for profligate governments to finance massive deficits without extreme taxation. With interest rates low or negative, wage gains are restrained, COLA increases are subdued, and interest on savings and bonds becomes non-existent. The net effect is negative real rates which necessarily reduces the standard of living for many working people. Ultimately, disgruntled citizens, tired of seeing their standard of living deteriorate, snap into action. We also see these policies exacerbating income inequality. Every available data set shows the outsized gains for the top 0.1% yet the politicians continue to demonize the top 1% (most likely because they are the beneficiaries of top 0.1% campaign donations and influence). Yet another reason for working people to snap into action. Buy gold and silver for the eventual social upheaval and buy real estate and REITS for the period between now and then. Just my humble opinion.
sestak22 profile picture
No one can benefits from negative intrest rates
Government can for a short while - they can borrow without worrying service debts.
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