Prepare for Negative Interest Rates

As a result of the coronavirus, world economies have turned frantic. That includes the United States. Chairman Powell of the Federal Reserve Bank has announced that interest rates will be lowered by another .50 points to help boost our economy. The announcement came soon following President Trump’s declaration that Powell was too slow to act in view of the coronavirus and demanded a harder push for a cut in interest rates. Trump referred to other central banks around the world who had already cut their rates. 

The coronavirus is presenting the Federal Reserve and other central banks with unprecedented economic havoc. There are no rules to follow in a situation where access to worldwide goods has been cut while countries are looking to the central banking system for solutions.

Our economy is still robust. Federal interest rates hover between 1 percent and 1.25 percent. But the panic following the coronavirus is changing the global economic scenario and imbuing it with lots of unknowns and uncertainties. The stock market continues to be extremely volatile, given President Trump’s latest stimulus proposition. 

The uncertainty is real. Still, many economists have expressed concern that lowering interest rates is not the best way to deal with the coronavirus crisis. It will do nothing to help freighters load up supplies and distribute them throughout the world when these freighters cannot enter many harbors, especially in China. Lowering interest rates to near-zero levels does not bring about the global trade on which every country depends. The coronavirus is quickly spreading to countries other than China and making its effects felt around the world. Lowering interest rates may make borrowing less costly, but it will do nothing to stimulate economic growth when many countries are no longer able to import or export needed goods.

Still, cutting interest rates appears to be the economic band-aid of choice. The European Central Bank plans to cut its current deposit rate of minus 0.5 percent another 10 points. The Bank of Japan could slash interest rates below zero. The Bank of England will likely cut its interest rates by .25 point. Interest rates around the world have remained low since the financial crisis of 2008. As a result, these central banks will be unable to cut them any further.

If the current pandemic has a major effect in the United States, it is almost certain that the United States and the rest of the world will experience a serious recession, with economies around the globe being affected.

According to Roger Aliaga-Diaz, at Vanguard, Powell’s current rate cut may have been premature, limiting any possible actions at a later time. If the effect of the coronavirus worsens, the actions of the Federal Reserve will most likely become more aggressive. It might cut more points, placing us in negative interest territory. But no amount of financial manipulation will be able to resolve what could be a major world health problem. But it will put stock prices and bonds yields in a risky situation. 

If the coronavirus is causing problems, it is only a prelude to the wider problem of negative interest rates.