A couple of months ago, the Fed raised its key interest rate by a quarter of a percent. This was the first increase in nearly ten years. The markets shivered and shook, all kinds of predictions were made and what happened next? Well here we are two months on and banks are talking about – and some are actually doing it – “paying” negative interest rates on cash deposits. Yes, the interest rate went UP but what banks are willing to pay is going DOWN. Does that even make sense?
Certainly from the banks’ standpoint it does. After all these are for profit businesses and they need to make money to cover their substantial overhead and pay their shareholders. That is not an easy thing to do when they must pay interest to their depositors. Further, with requirements that the banks hold a substantial amount in reserve, money that cannot be lent out at interest, the pressure increases.
It is a little different standing in an investor’s shoes but, at bottom, investors may be willing to accept negative interest rates at a very low level in order to be invested in what they consider safe investments that should not lose any more than the fractional amount representing those negative rates. With inflation low in many areas, a negative interest rate might also be seen as protection against the ultimate in low inflation, which is deflation. Perhaps these investors’ fears are exaggerated but those fears are addressed by the negative interest rates.
Small investors and particularly retirees on fixed incomes have been feeling the pain of very low interest rates for quite some time now and the negative interest rates must be frustrating, especially after the miniscule rise in that key federal interest rate. On the flip side, mortgage interest rates remain very low, though if you are hoping for a negative interest rate on your mortgage, you are out of luck. Remember, when lenders can get something for the use of their money, they are doing what makes their business tick.