2-Minute Money Manager: What Are Negative Interest Rates?

Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about interest rates; specifically, an explanation of negative rates and how they affect savers.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “4 Ways to Earn More on Your Savings — Despite Another Fed Rate Cut” and “Here’s How to Make 24 Times More on Your Savings.” You can also go to the search at the top of this page, put in the words “investing” or “savings” and find plenty of information on just about everything relating to this topic.

And if you need anything from a higher-paying savings account to the best financial advice, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from William:

“The president recently tweeted that the Federal Reserve should lower interest rates to zero or even to negative rates. What should the average saver nearing retirement age do with their savings?”

Understanding interest rates

Back in the early 1980s — when I began my career as a Wall Street investment adviser — you could get a perfectly safe savings account that paid 20% interest.

Those were the days.

As you well know if you’re a saver, these days it’s hard to earn 2%. And just when you think it couldn’t possibly get any worse, you start hearing about the potential for negative interest rates. As William points out, President Donald Trump last month tweeted, “The Federal Reserve should get our interest rates down to ZERO, or less.”

The reason the president wants lower rates is that low interest rates stimulate the economy, and good economies help re-elect presidents.

Low rates help the economy in several ways. For example, both consumers and companies are more likely to spend if they can borrow inexpensively. After all, the less interest we pay, the more money we have — and the more we spend, the more the economy grows.

Low interest rates also cause a nation’s currency to weaken against those of other countries, which makes it cheaper for other countries to buy our stuff. This boosts exports, stimulating the economy.

Low rates can also help the stock market. Since businesses pay less interest, they’re more profitable. Also, when bank interest rates are terrible, investors seek out other options, like the stock market.

So, although low interest rates aren’t good news for savers, they can get the economy moving.

Understanding negative rates

You’d think that the lowest interest rates can possibly go is zero, right? I feel you. I’ve been doing this stuff for nearly 40 years, and I’d never heard of negative rates either — at least until a few years ago, when negative rates started popping up in Europe and Japan.

Negative rates, as the label implies, are the mirror image of typical interest rates. Normally, when you put money in the bank, they pay you interest. When rates turn negative, you’re literally paying the bank the hold your money.

But the important thing to understand about negative rates is they’re not really aimed at you. Negative rate policies target banks.

Just as you park extra money in a savings account at a local bank, banks park their excess reserves with their nation’s central bank. (The U.S. central bank is called the Federal Reserve.) And just as you earn interest in your savings account, banks earn interest on their central bank deposits.

But if that central bank starts charging interest instead of paying it, banks are motivated to take their excess money out of the central bank and do something else with it, like lend it to people and businesses. After all, better to earn even just 1% or 2% by lending rather than pay to keep their money in the central bank.

And so we’ve just goosed the process I explained above; consumers and businesses get cheap loans, which results in more spending and a growing economy.

Bottom line? The idea behind negative rates is to basically force lenders to lend.

Could consumers see negative rates?

It’s possible negative rates could flow through to the consumer. In other words, should negative rates arrive on our shores, we could be forced to pay to keep money in a savings account. Or, on the other side of the coin, we could theoretically get a mortgage that pays us interest instead of us paying interest to the lender.

In fact, it’s already happened in Scandinavia.

Not long ago, a Danish bank started offering mortgages with zero and negative rates. From The Guardian:

“Jyske Bank, Denmark’s third largest, has begun offering borrowers a 10-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.”

With a negative-rate mortgage, instead of paying interest, you’d literally pay back less than you borrowed.

Pretty wild, isn’t it? But it’s not the norm. In countries with a negative-rate policy, it’s usually banks that are being charged to park their money, not consumers. Nor, despite the example above, are consumers typically able to get paid to borrow.

Will we see negative rates in the U.S.? Former Federal Reserve Chairman Alan Greenspan thinks so. He recently said on CNBC, “You’re seeing it [negative rates] pretty much throughout the world. It’s only a matter of time before it’s more in the United States.”

What’s a saver to do?

Several weeks ago, I wrote an article called “5 Reasons I’m (Partially) Dumping Stocks Now.” From that article:

“We’re now in the longest economic expansion the nation has ever seen. While it’s certainly possible for the party to continue, we’re definitely closer to the end than the beginning.”

In short, I think odds are good we’ll see a recession in the next year or two. When that happens, already-low rates will fall farther as the Fed attempts to stimulate the economy. Rates may or may not become negative, but either way, it’s bad news for those attempting to live off the interest on their savings.

So what should you do?

For one, use certificates of deposit to lock in rates now, as we’ve suggested in multiple articles like this one. Visit this page of our Solutions Center to see the best CD rates today.

Don’t lock up all your savings, though. Keep some powder dry. After all, I could be wrong. It wouldn’t be the first time.

After locking in some of your savings, check out articles like “Ask Stacy: How Can We Earn More on Our Savings?” to learn about investment alternatives, like stocks, mutual funds, bonds, peer-to-peer lending and real estate.

Hope that answers your question, William!

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About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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