Question mark icon with text, Negative interest rates

Deposit money, earn interest. Borrow money, pay interest. If that sounds like banking in a nutshell, you’re right. But there’s been some buzz around a unique monetary policy that turns those basics inside out: negative interest rates.

First things first: the U.S. has never used negative interest rates. In fact, it’s highly unlikely negative interest rates will affect you at all. The chance of U.S. banks ever paying you to lend money and charging you to deposit it is extremely slim. That’s because negative interest rates generally impact banks at a high level, rather than you at an individual level.

Since there’s no real indication that negative rates are on the horizon in the U.S., don’t let worry of them impact your current banking decisions. Instead, you can sit tight and continue to stay informed on the concepts you’re seeing in news headlines — and you’ve come to the right place to start.

What are negative interest rates?

Here’s the gist: In a negative rate environment, banks would theoretically pay you to borrow money and charge you to keep it deposited, as a method to encourage lending and spending. And of course, it’s not quite actually that simple … not to mention considered incredibly unlikely to be implemented.

Negative interest rates are basically what they sound like: interest rates below 0%. Setting rates this low is a monetary policy sometimes implemented to stimulate a depressed economy. To get a better grasp of the concept, it helps to dig a little deeper to understand how interest rates work in the first place.

The Federal Reserve (the U.S. central bank) sets interest rates to help manage the ebbs and flows of the U.S. economy. You’ll usually see higher interest rates during an economic boom and lower interest rates in an economic downturn. This is because higher rates help stave off inflation and lower rates encourage people to borrow money and spend more, which stimulates the economy.

The idea of negative interest rates can come up as one option when an economy is struggling (like during a recession). The theory is that if low rates are good for a struggling economy, then sub-zero rates could lift an economy out of crisis. Banks would lend more. People and businesses would spend or invest instead of leaving funds in a bank account, where they would decrease in value over time.

Why is the U.S. unlikely to adopt a negative interest rate strategy?

The general consensus among finance experts is that the Federal Reserve is unlikely to adopt a negative interest rate strategy for several reasons. So, why is that?

For one thing, the Fed has said it’ll hold its benchmark interest rate at close to zero through 2022. While that’s as low as the U.S. has seen since the 2008 financial crisis, the Fed’s actions and statements in response to the coronavirus recession indicate a strong reluctance to go any lower.

In addition, negative interest rates may not actually yield desired results. There’s no guarantee that people will start borrowing money, or that they won’t instead choose to withdraw their cash in droves. The jury is still out on negative rates in countries who have been experimenting with this strategy since around 2009.

Negative interest rates are a hot topic in uncertain times.

During the COVID-19 pandemic, the Fed has indeed employed a number of stabilization policies, including slashing interest rates. While some policymakers believe taking rates into negative territory seems like a logical next step, it’s important to note that most economists agree that it’s an unusual approach with unpredictable side effects.

Proponents of negative interest rates say that these rates would encourage lenders to issue more loans and borrowers to spend, as well as devalue the country’s currency. That might sound counterintuitive, but devaluing a country’s currency actually promotes trade by reducing the number of foreign investors out and increasing demand for exports. Which is one reason why negative interest rates have popped up in the news, sometimes with touts of the positives of borrowing on the cheap.

But since the strategy is relatively new and rarely used (by a few central banks outside the U.S.), there’s not a lot of proof that it works. And critics believe the risks outweigh the rewards.

So right now, you may see stories about negative interest rates popping up on your TV or newsfeed. But remember, they’re highly unlikely in the U.S. and even less likely to impact you— and the best thing you can do right now is continue to stay in-the-know.

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