Fed’s Powell Denies Negative Interest Rates in the Works, But Does He Have a Choice?
In a widely watched speech in Washington yesterday, Federal Reserve Chairman Jay Powell reiterated his opposition to negative interest rates. In doing so he joined a chorus of other Fed policymakers who have stated in recent days their opposition to introducing negative rates. But with increased political pressure from the White House, will Powell be forced to cave?
President Trump has characterized negative interest rates as a gift, and urged the Fed to introduce negative rates as soon as possible. But the “gift” of negative rates is only a gift to those who are able to borrow money at negative rates. It’s not a gift to the depositors, savers, and investors who are not only forced to forgo a yield on their savings, but also forced to pay the people borrowing their money for the privilege of having their money borrowed.
If interest rates go too far into negative territory, depositors will begin pulling their money out of the banking system, risking a collapse of banks as they withdraw the base money propping up the fractional reserve banking system. In that way, negative interest rates are more of a curse than a blessing.
The European and Japanese experiences with negative interest rates have already demonstrated their futility in stimulating economic activity. Both economies remain stagnant despite, and more likely because of, the massive amounts of monetary stimulus and the move to negative interest rates.
Powell may not have a choice, however, as both markets and the White House will be pushing him to introduce negative rates. Bond markets have already begun pricing in the likelihood of negative interest rates later this year, and the political pressure from the White House may be too great for the Fed to bear. We’ve already seen Powell capitulate to Trump on monetary stimulus, with the Fed unleashing a monetary tsunami greater than anything seen before. Is it really realistic to assume, then, that the Fed won’t end up pushing rates negative later this year?
Of course, a lot of the Fed’s actions will depend on how well or poorly the economy (or stock market) is doing. That’s the barometer Trump uses to judge the health of the economy, and a healthy economy is vital to his reelection chances this November. So don’t be surprised to see the pressure ramping up as the election nears.
Investors will want to keep an eye on what is going on, as the risks to their investments will grow as November nears. The pressure to introduce negative rates will grow too, and that could wreak havoc on your investments.
With stocks set to crash, bonds about to fall as a wave of corporate downgrades faces markets, and cash not an option as negative rates threaten to wipe out savers, many investors are unsure where to turn. Many of them have found solace and safety in traditional safe havens, such as gold and silver. Unlike mainstream financial assets that depend on strong economies and a healthy dollar for their value, gold and silver perform well even with economic headwinds. In fact, some of their best performances occur during times of financial strife and economic upheaval.
Thousands of investors have benefited from investing in a gold IRA, which offers the same advantages as conventional IRAs, but allows investors to own physical gold coins and bars. Many investors even roll over existing retirement account assets into a gold IRA, which can be done without tax consequences. In a time of growing financial uncertainty, can you afford not to trust in the safety and soundness of gold?