Joining us to talk about negative interest rates is chief economist Carl Tannenbaum. So we're seeing negative interest rates in some European countries. What's going on?
Many European countries have continued to struggle, even eight years after the financial crisis, and negative interest rates, in theory, are a way to make borrowing cheaper if those loans are used to advance economic growth. And that should be beneficial and hopefully pull Europe out of the funk that many countries have been in for quite a long time.
When rates fall below zero, will this help the European economies?
I'm going to give you a typical economist answer, and that is, it depends. Because while the central bank can set rates in negative territory, commercial banks may not choose to follow them. And that's been the case in Europe so far. Wanting to avoid the shock of negative interest rates, European banks have held their own client rates still at positive levels. And so it hasn't really resulted in any renewal of credit extension.
Is this creating, from a saver's standpoint, an incentive just to hang on to cash?
That's one of the perversions of negative interest rates is, if you are an account holder, and you're seeing the balance in your account fall month over month because rates are negative, you might think, well, maybe I should hold on to cash. We haven't seen that so much because it is expensive to hold cash. You have to store it. There's a risk of it getting lost. If you have lots of cash, and you need to pay your rent, it's not particularly easy to do that. So there have been some studies that estimate that rates have to be very, very negative in order to promote a lot of hoarding of cash.
Meanwhile, the US has been going the opposite direction. Do you see any possibility of this coming to the United States?
While it's been reviewed by the Federal Reserve, I think it's a very remote possibility at this time that we would see negative interest rates here. Based on our economic fundamentals, it looks like the Fed is more likely to be raising interest rates because we're doing relatively well.
And then because of the structure of the American financial scene, I think negative interest rates may actually be counterproductive here. In addition to the potential for cash hoarding, you also have a big complex of money market mutual funds that would be forced to get very far from a unit asset value if you had negative interest rates. And that could cause all kinds of liquidity dislocations that might actually make the problem worse instead of better.
Carl, thanks so much.
You're very welcome.