Current Economic Environment Leads to Negative Rate Thinking

on "June 29, 2020 1:12 pm"

With interest rates in the U.S. economy already hovering near zero, what is the likelihood they could go lower – below zero? Going negative is positively a possibility, says Mark Wert, a senior advisor at Catalyst Strategic Solutions.

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"As much as we want to deny the possibility of negative interest rates, the notion cannot be completely ruled out within the current economic climate," Wert wrote in a just released Strategic Insight.

Wert's comments echo emerging economic voices that spotlight the notion that interest rates might drop below zero.

The United States "will need to consider negative interest rates and aggressive government spending, such as spending on infrastructure," Yi Wen, an economist with the St. Louis Fed, recently wrote.

And while many economists expect the Fed to resist going subzero, some say the central bank will eventually follow Europe and Japan down that road. For instance, Bankrate's chief financial analyst Greg McBride said earlier this month that he thinks negative rates are "inevitable" in the United States.

If the Fed did bring its benchmark rate into negative territory, that would likely mean lower mortgage and credit card rates for everyday Americans – but even lower returns on savings. And while negative interest rates would affect consumers, they would also impact financial institutions.

"The concept of negative interest rates is not going away any time soon and could potentially become a reality. Therefore, we must address the elephant in the room – are financial institutions ready?" Wert asks.

"Similar to the Y2K scare at the dawn of the millennium, it’s a question of whether or not your systems can handle negative rates," Wert said. "Sure, you can charge fees on zero-interest-bearing deposit accounts to create negative returns, but can your credit union model its balance sheet using negative rates? Are you able to offer members loans at negative rates? What mechanics would it require?" Wert asks in the Strategic Insight.

Tools, such as an industry rate comparison, can help credit unions increase their awareness about the current rate environment, state-by-state or on a nationwide basis, said Wert, whose role as a senior advisor is assisting credit unions in meeting financial management and strategic planning goals.

Prior to joining the Catalyst Strategic Solutions team, Wert was at the Federal Home Loan Bank of Dallas for nearly 15 years, where his responsibilities included issuing low-cost funds into the capital markets; managing the Bank’s investments; managing interest rate risk through cost-effective hedging strategies and overseeing liquidity management.

To read Wert's comments regarding the possibility of negative rates, visit here.