Negative Rates in the US?

Mar 3, 2016 by

 

Janet Yellen - negative interest rate

Savers’ enemy and debtor’s friend?

Canadian and American readers: negative interest rates may be on the horizon.

Negative Interest Rates Are Here Now

First, lest you think negative rates are only the latest paranoid fantasy, know this: Central banks in Japan, Switzerland, Denmark, Sweden, and the 19-country Eurozone have negative interest rate policies today. The Bank of Canada’s governor Stephen Poloz said publicly last December that negative interest rates are among the tools in the bank’s kit and could be considered in the future. Federal Reserve chair Janet Yellen recently said this on negative interest rates to a Congressional committee: “We’re taking a look at them … I wouldn’t take those [negative rates] off the table.”

What Are Negative Interest Rates?

Banks keep on deposit with central banks their excess reserves (those deposits above what is required by law). Normally, the central bank pays a small interest rate on these deposits. But when a central bank adopts a negative interest rate policy, instead of paying interest, the central bank charges interest on bank deposits with the central bank.

For example, the rate the Eurozone’s central bank pays on bank deposits today -0.3%. €100 million on deposit for one year would cost the depositing institution €300,000.

What Is the Purpose of Negative Interest Rates?

In theory, a cost to holding cash will encourage banks to lend instead of hoard cash. Lending boosts growth, and that’s the central bank’s aim.

Whether this effect will materialize is unknown. Negative rates at the scale they’re now being deployed are an experiment. No one knows the outcome, except perhaps in the short-term: after the Bank of Japan announced negative rates, domestic bank share prices dropped about 30%.

How Would Negative Interest Rates Affect You?

Banks are businesses, and negative interest rates would be perceived as a business cost, just like labor and rent. Because businesses’ central aim is to preserve and grow profit margins, cost increases typically are passed on to the business’ customers. Negative rates are no different.

One way or another, consumers will pay for negative interest rates.

In the Eurozone, despite a significant central bank negative rate policy, rates on consumer deposits remain positive. In a recent Business Insider article, Bill Demchak, PNC Bank Chairman and CEO stated clearly the impact on consumers of a negative interest rate policy in the US: “If rates go negative, consumer deposit rates go to zero and PNC would charge fees on accounts.”

Charging negative interest on consumer accounts would probably be impractical—too challenging to explain. But bank customers are already accustomed to paying fees. Instead of being paid 0.10% interest on the money you have on deposit at your neighborhood bank, maybe you’ll get zero interest and see a $10 per month “account fee” or a $10 per $10,000 on deposit monthly “service fee.”

And banks have myriad opportunities elsewhere—lending, mortgage servicing, investment advice—to recover their negative interest rate cost. Somehow, somewhere, bank customers will pay more and get less to offset the cost to banks of negative rates.

Alternatives to Banks for Your Cash

Naturally, if keeping their cash in a bank begins costing consumers money, they’ll search for alternatives. In Japan, sales of home safes have jumped. But stashing loads of cash and valuables in a home safe is probably a bad idea.

Also, you may have noticed that central banks may be moving toward eliminating high denomination currencies. The €500 note and the US$100 bill may soon be history. If these denominations are take out of circulation, stashing cash becomes—perhaps not coincidentally, as banks roll out negative rates—significantly more impractical. $100,000 in $20s takes up five times as much volume as $100,000 in $100s.

What do you think of these alternatives to paying a bank to hold your cash?

  • Gold
  • a stored value card
  • Bitcoin
  • safe deposit box
  • the mattress
  • buy equities or bonds

Wall Street will of course be pushing that last option, but it’s not for me. I see safety, cost, or practicality issues with each of these alternatives. But with a large portion of our assets in cash (both US and Canada), I’m keenly interested to come up with a safe way to “store” cash that doesn’t cost me money. I’ll be damned if I’m going to pay my bank to keep money for me. Of course, I wouldn’t blame my bank—central bankers are responsible for negative interest rates, and it’s to those institutions that we should direct our ire if negative rates come to the US or Canada.

What are your thoughts on the consequences of negative interest rates for you? Do you have any non-bank suggestions for cash storage?

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