The Federal Reserve hasn’t left itself much room to keep cutting interest rates in its fight against the coronavirus, which Fed Chairman Jerome Powell says is worse than anything the U.S. economy has faced since World War II.
America’s central bank has already slashed its benchmark interest rate down to about zero, matching the all-time low hit during the 2008 financial crisis and its aftermath.
The Fed’s record-low rates have contributed to today’s historically low mortgage rates and a range of other deeply discounted borrowing costs.
But if officials want to take interest rates even lower to lift the economy, they’re going to have to go below zero — into the strange land of negative interest rates.
Powell said again last week that the Fed doesn’t want to do that. But President Donald Trump has said he wants negative interest rates, and markets are betting we’ll see them before long, maybe by the end of the year.
Here’s more about how negative interest rates work — and what they could mean for mortgages specifically.
Turning interest upside down
Theoretically, negative interest rates take interest into a kind of looking glass land where savers have to pay interest for banks to hold onto their money, and borrowers are paid interest as an incentive to take out loans, including mortgages.
Central banks in Europe and Japan have already gone negative with rates in hopes of stimulating their economies. And Trump says it ought to happen here.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!” he tweeted on May 12.
A day later, in an online speech, Fed chief Powell said the coronavirus is putting the U.S. economy through “something significantly worse than any recession since World War II,” and he warned of the potential for “lasting damage.”
But Powell also has said negative interest rates aren’t the answer. During a Princeton University webinar on Friday, he reaffirmed that Fed policymakers aren’t interested in taking rates below zero.
“The evidence on whether it actually helps is pretty ambiguous,” the Fed chief said. “You’re crushing down on bank margins and that makes them lend less.”
Still, the rate options market has given a 1 in 4 chance that the Fed will take its key rate below zero before the end of 2020, according to Bank of America Securities data reported by Reuters.
https://finance.yahoo.com/