Low rates are often a sign of a struggling economy. When rates decrease, people are more likely stimulate the economy by taking out loans and swiping their credit cards. And as the coronavirus pandemic drags on, the US economy is taking a hit .
Right now, the federal funds target rate is 0% to 0.25%. If the Fed lowered rates again to help the US economy, rates would drop below zero.
Negative interest rates are controversial, but countries such as Switzerland, Denmark, and Japan have already implemented the system.
What would negative rates mean for American consumers? Basically, you would earn money when you borrow and spend money to keep your money in a bank account.
Negative interest rates would make it more affordable to borrow and more expensive to save with a bank
Negative interest rates would take things to the next level. Here's how:
Loans
If you take out a loan at a negative interest rate, you don't pay interest on the amount you borrow. Instead, the lender would pay you.
Right now, you end up paying more than the amount you originally borrow over the course of your loan because interest accrues. With negative interest rates, you'd end up paying back less than you borrowed, so you'd earn money in the long run.
Negative interest rates would encourage people to buy homes, use credit cards, and take out other types of loans. By spending more, people would be helping the US economy.
Bank accounts
Right now, you may be stashing your money in a bank account and earning interest.
If the federal funds rate dropped below zero, you wouldn't earn interest at your bank you'd actually pay a fee to keep your money in the bank. This fee would be relatively small maybe a few dollars per month.
Charging people to keep money in the bank is meant to encourage people to spend their money, which puts money back into the economy.
Negative interest rates are unlikely in the US
The Federal Reserve is the agency in charge of slashing rates, though, and Fed Chair Jerome Powell isn't convinced.
In an interview with "60 Minutes," Powell said, "There are plenty of people who think negative interest rates are a good policy. But we don't really think so at the Federal Reserve. And I think it's an area of real uncertainty in the central banking world."
For now, negative interest rates look unlikely for the US economy.
