What Will Happen to Savings and CD Rates If the Federal Reserve Takes the Fed Funds Rate Negative?
Image Narayana Kocherlochota, Courtesy Marketwatch

What Will Happen to Savings and CD Rates If the Federal Reserve Takes the Fed Funds Rate Negative?

Rate information contained on this page may have changed. Please find latest savings rates.

There is a lot of concern that the Federal Reserve is running out of bullets in its response to the current Depression.   It has already lowered the Fed Funds rates to zero, engaged in extraordinary quantitative easing, and opened up the Federal Reserve’s balance sheet in a way that makes the Federal government an active player in US debt markets.  

Narayana Kocherlochota, the former Chair of the Minneapolis Fed, makes a compelling argument on Bloomberg.com today for the Federal Reserve and Chairman Jerome Powell to lower the Federal funds rate to negative territory through at least a 25 basis point cut.   Kocherlochota argues that the benefits in terms of stimulating bank activity far outweighs the risks in light of the fact that the unemployment in the US continues to spiral out of control.   

In a 2015 article on CNBC, Goldman Sachs’ Jan Hatzius recommended that bringing interest rates negative for any length of time must be viewed as a last resort because of the resulting impact on banks’ financials and the dislocation that such a move would cause in the US.

Of course, since the US has not experienced negative interest rates before, it is more of less entirely hypothesizing what the impact on savings and CD rates would be.   Today, even with the Fed funds rate sitting at a target of zero to 0.25%, online savings rates are holding firm at or over 1.50%, with one-year online CD rates still higher.   (You may be able to find higher local savings rates and local CD rates where you live by checking here or here.)  

It would seem that a quarter point move in the Fed Funds rate, bringing it so decisively into negative territory, would cut out any yield in savings and virtually everything in CDs.

This action would put further pressure not just on banks, but on savers who will not be able to maintain purchasing power of safely invested assets against a continued rise in US CPI of around 1%.    It would also put still further pressure on local and federal governments who depend on taxation of earned interest.

Am I wrong?   Please let me know below what you think happens if the Federal Reserve takes rates negative.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

Your code to embed this article on your website* :

*You are allowed to change only styles on the code of this iframe.


Comments

Add your Comment