Have you heard of NEGATIVE interest rates?!?

The Federal Reserve sets the lending rate, which drives interest rates.

The end of October brought the announcement of another interest rate cut by the Federal Reserve. As with previous cuts, the expectation was that mortgage rates would drop. But just how low will rates go?

A new analysis from the Urban Institute detailed a rate scenario that has never occurred in the U.S.: negative interest rates. Check it out:

  • How do interest rates go negative? The short answer: when the supply of investment capital exceeds demand.
  • Negative mortgage rates would require a rate decrease of more than 350 basis points. There is a precedent for a drop of this size: Rates declined by 300 basis points between 2007 and 2012.
  • Mortgage rates in Denmark have been around -0.50%. Several other countries, including Japan and Germany, have had negative nominal interest rates.

So what would negative interest rates mean for borrowers? As the Urban Institute report explained, “A negative mortgage rate on a 30-year fixed-rate mortgage does not mean the homeowner receives a payment. Rather, the homeowner still makes a payment each month, but the balance owed decreases by an amount greater than the mortgage payment.” Additionally, the report said negative rates would likely spur a significant rise in refinances.

However, the report also stated that while negative interest rates would cause minimal disruption to the mortgage finance system (and possibly an increase in housing affordability), it’s highly unlikely a negative rate environment would occur here in the U.S.

Click here for the full report.

Click here for the original article.


Zach’s note:

There’s a lot to read between the lines of this article.

Without dropping a massive history lesson, it’s important to note that the Federal Reserve is a private corporation – NOTE a component of the US Government. It’s no more “Federal” than Federal Express.

Federal Express - now known as FedEx
Yes, it was “Federal Express” before streamlining to “FedEx”

Yet the Federal Reserve is at the core of our overall monetary policy.

Secondly, although our rates are incredibly low right now, it’s possible for them to drop even more. The likelihood is a coin toss.

Interest Rates could stay the same, or even creep up a bit, and that would be a natural consequence of the economic growth over the last decade.

But we’re also overdue for a recession, and the natural strategy for recovery is to print more money (“quantitative easing”) and lower interest rates.

While this article implies some desirable potential consequences, negative interest rates are definitely not a good thing.

Zach@ZachKidd.com

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