President Donald Trump stepped up his criticism of the Federal Reserve Wednesday, upping the ante by declaring the Fed should explore negative interest rates. Investors and economists say this could be a disaster for the U.S.
The Federal Open Market Committee is expected to cut the benchmark interest rate by at least 0.25% when it concludes its meeting next Wednesday, to 1.75%-2.00%. It’s low by historical standards, but rates around the globe are lower still — and some are already in the negative.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said negative rates are far from a panacea.
“Do I think that’s the elixir for what ails us? No,” she told Yahoo Finance’s On the Move. “We’re learning that negative interest rates have not been a powerful igniter of economic growth, and I don’t think it would be any different here.”
The European Central Bank — which is set to make an interest-rate decision Thursday — has held its main refinancing rate at zero since 2016. Germany’s 10-year government bonds have had negative yields since May. Its shorter-term, two-year debt has had a below-zero yield for the past five years. It hasn’t served to boost the nation’s economy; German gross domestic product fell by 0.1% in the second quarter.
A lot of uncertainty
Sonders said that cutting rates targets the wrong problem — liquidity — instead of the real problem — the trade war.
“What ails us right now is a tremendous amount of uncertainty, a serious diminishing of animal spirits, particularly on the corporate side, a rolling-over in capital spending intentions, all tied to the trade war,” she said.
Cutting rates to zero or below would also disincentivize savers in the U.S. It would theoretically mean banks could pay zero interest on deposits — or that depositors could even pay banks for holding their money.