We’ve been hearing a lot about negative interest rates recently, and whether the U.S. is headed there. They’ve been used by other countries recently to fight deflation. A Denmark bank has also become the world’s first to offer a home loan with negative rates. That means that borrowers pay back less every month than what they actually owe. It sounds like quite a bargain for anyone in the real estate business, but negative rates for any reason are probably not something we want to wish for.
As homeowners across the nation watch for an opportunity to refinance their home loans at a lower rate, news about the Denmark bank may sound like a dream come true. Jyske Bank is the third largest bank in Denmark and is offering ten-year fixed-rate mortgages for -.05%.
MarketWatch also reports that Finland-based Nordea Bank will offer a 20-year fixed-rate mortgage in Denmark for zero percent. (1) It’s also considering a 30-year home loan with negative rates. And the interest rate in Denmark is already very low — it’s only .5%.
Could something like this happen in the U.S.?
It’s hard to predict where the economy will go when there are so many moving parts. Other countries have set interest rates for government bonds below 0% as a stimulus, to help encourage spending, and boost prices. Many economists, at this point, don’t think negative rates are likely to happen in the U.S. for government bonds, or home loans, because the economy here is still strong enough.
Negative Interest Home Loans
Jerry Anderson, of Alliant Credit Union told Fortune, “I have not seen or heard of negative rates on a loan and would not anticipate a U.S. financial institution to engage in negative rates.” He says, “This is very extreme and most likely restricted to Denmark.” (2)
Zillow’s Skyler Olsen described some of the conditions needed for mortgage rates to go negative. She told Inman, “Inflation would need to mute dramatically and economic growth would need to slow significantly for a long period of time.”
And the results would be bad news for the housing market. She says, negative interest rates would probably crash the real estate market because home prices would go even higher and loans would only be given to the most creditworthy borrowers.
While negative interest rates of any kind might seem like a remote possibility in the U.S., there has been talk about the possibility of the federal funds rate going negative. Conditions may not be right for that now, and most economists don’t expect to see that rate dip below zero in the near future, but it’s food for thought. MarketWatch offers a few examples of how negative rates might impact our economy.
Impact of Negative Rates
For one, if the overnight lending rate went negative, banks would have to “pay” the central bank for the privilege of storing their reserves. That would take a bite out of bank profits, although they could, conceivably, pass along those costs to their own customers. In other words, bank customers would pay the bank for holding on to their money in a savings account.
That could backfire, however, because individual depositors may say “the heck with that,” withdraw their savings, and stuff it in their mattress. If too many customers did the same thing, there could be a run on money getting withdrawn from U.S. banks… and that’s never a good thing.
For people who choose to leave their money in the bank, negative rates could make it hard to save up for a big purchase, like a home. Negative rates would eat away at those savings. That could push homebuyers to make a hasty, and possibly regrettable, decision about what they buy — all so they don’t “lose” money in a savings account.
With lower interest rates, we’d probably see even higher home prices, and fewer loans from banks. Because banks are making less money on loans, they’d want to reduce their risk, and loan to people with only the best credit.
Benefits of Negative Rates
The Balance has a nice write-up about the usefulness of negative rates. In addition to a tool that fights deflation and fires up the economy, they can encourage foreign investment. That could help lower a country’s currency valuation, and boost exports. Economists say, it has been difficult to quantify the positive effects for countries that have done this.
Currently, there is pressure from the White House to employ a lower rates economic strategy. But, it’s the Federal Reserve’s job to make that decision, and most board members feel the economy is strong enough to keep interest rates where they are.
Fed Chief Jerome Powell has indicated that they are prepared to cut rates if necessary. He says, the board is watching economic conditions, and is ready to act appropriately if things change or deteriorate.
Minutes from a recent meeting indicate that members view the July rate cut as a “recalibration” and not a precursor to future rate cuts. Kansas City Fed President Esther George spoke recently in a MarketWatch interview. She said, she doesn’t see the need for any rate cuts at the moment. She said, monetary policy tools need to be aimed at the economy.
She explains, “The way I was looking at it… how are we doing relative to our mandates from Congress around employment and price stability. In my view, we have a very low unemployment rate right now, job market looks healthy, consumer sentiment seems to be healthy right now, and inflation is low and stable. It’s staying right around the Fed’s target of 2%.” George was one of two members who voted against the last rate cut.
Pressure From The White House
We’re sure to hear more from the White House about cutting rates, if the trade war continues, and the global economy weakens further. President Trump is trying to boost U.S. exports, but the strong dollar is making U.S. products more expensive. By cutting rates, the dollar will weaken, and U.S. exports will become cheaper on the international market.
Trump recently tweeted in response to Germany’s negative bond yields. He said, “Germany sells 30-year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar. No Inflation! They move like quicksand. Fight or go home!”
A few things to remember:
1. The Federal Reserve acts independently in determining what’s good for the economy.
2. Interest rates are a tool the Fed uses to control inflation and deflation. If interest rates go too low, the tool becomes less useful in times of greater economic turmoil.
Should we have lower rates now? We’re sure to hear plenty more debate about this.
(2) Fortune Article