Janet Yellen stated recently that the Fed would consider using negative interest rates in order to stimulate the economy, but in order for this to happen the economy would have to become much worse than it currently is now. As we have been taught, a negative interest rate would decrease people's willingness to save money due to the low return, therefore people will find other ways to make money instead. When the Fed reduced the interest rates to almost 0% as they are today, the hope was that this would increase the amount of spending in the economy. However, this has not been the case and more saving occurred than the Fed expected due to the recent crisis in 2008.
If these rates are implemented, banks will have to pay fees for holding money instead of investing it. This would make it hard for banks to make any money as they are already struggling with the low interest rates today. Consequently, one of the biggest questions surrounding this topic is, would negative interest rates increase spending and decrease saving in order to stimulate the economy? The resounding answer is no one is certain. Other countries have implemented these negative interest rates, however answers are not clear as to their outcomes.
Do you think if the US economy were to further decline negative interest rates would work to increase spending and stimulate the economy or do you think people would continue to save as they have after the crisis in 2008?
http://money.cnn.com/2016/02/11/news/economy/negative-interest-rates-janet-yellen/index.html
I find this interesting especially because a few months ago no one would have guessed that interest rates would be going back down. The resounding thought was that the Fed was going to steadily increase interest rates through 2016, but very early in this process they're a chance they could be going the exact opposite direction. Personally, I don't believe that the Fed will resort to negative interest rates, I think that the most likely situation is that they will keep the current interest rate where it's at and significantly delay any increases to the rate.
ReplyDeleteI think the further decline negative interest rates would lead to deflation, which would produce some negative influence on the economy and in the end cause recession. And I don't think the negative interest rates would promote investment. Contrarily, people would save more money as deposit instead of consuming due to the opportunity cost.
ReplyDeleteI would be shocked if the Fed introduced negative interest rates. First of all, like you said in your summary, the economy would have to absolutely tank for that to happen. A slight recession may be possible, but I don't think it would be anything like the one in 2008. Secondly, negative interest rates are too big of a risk. Like you said, nobody really knows what would happen. I don't see the Fed risking the world's largest economy to something that is unproven.
ReplyDeleteI would be very shocked if the Federal Reserve chose to introduce negative interest rates to the US economy. As of right now, there is no real need to impose such an extreme measure that we have no idea how it would affect the US economy. As one of the largest and most influential economies in the world, we have to be very careful with our decisions as our choice will affect the rest of the global economy.
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