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Ask the Financial Expert: What Are Negative Interest Rates and How Do They Impact You?

Ron Joelson •  February 29, 2016 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about negative interest rates and what that could mean to you.

Do you have a question for our financial experts? Email it to us at:

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2015.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for nearly $90 billion in assets under management.

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: There’s been quite a bit of discussion about negative interest rates lately. So we’ve been asked what the impact could be for banks and institutional investors versus an everyday investor like many of our clients. So today I’d like to get your insights into this very interesting, unique topic and what people need to be aware of. So can we start with the basics? What are negative interest rates, and who’s immediately impacted by them?

Ron: With negative interest rates you pay for the privilege of storing cash. Right now, that applies primarily to commercial bank deposits. When commercial banks have reserves, they’re being charged by central bank institutions for having those reserves in cash.

While negative rates only apply to banks right now, that could move to individuals at some point. Right now many banks are choosing to eat that cost, but they could pass it along to consumers. In fact, in some cases they already have, in the form of higher fees.

Mark: Now that we know what they are, what countries have used them? I mentioned Japan, but can you give us a little more background?

Ron: Yeah. Denmark, Switzerland, Sweden. Basically, the 19 nations in the Euro Zone. The Euro Zone has announced a negative .3 percent rate, and Bank of Japan, I believe was negative .1, although that only applies to new reserves. So there are different ways in which they’re actually deploying the concept. The thought is that these countries are trying to stimulate their local economies. They’re hoping that banks will lend more because it’s costing them to keep the cash. In the same way that lower rates should encourage banks to lend and people to borrow, they’re hoping that this will do that even more so. They’re also hoping it’ll cheapen their currencies and make their local economies more attractive for export.

Mark: Okay, so now we know a little bit about what they are and who’s using them. In the U.S., rates just ticked up a little while ago. Brent, do you think this will come to the U.S. anytime soon?

Investing for You: 5 Critical Questions for a Smart StrategyBrent: We think it’s unlikely. It doesn’t mean that the U.S. won’t look to use it in the future because they’re always planning ahead for things they could do in certain circumstances.

But if you look at the inflation rate in the U.S., it’s been ticking up a little bit, depending on which inflation monitor you’re looking at. We just reported core CPI of 2.2 percent year over year. You have the unemployment rate at 4.9 percent. You have wages moving higher. Most importantly, as Ron mentioned, negative rates are a tool to get banks lending. In the U.S., bank lending is growing—about 8 percent on a year-over-year basis. Certainly, it’s more than what it was in ’14 and ’13. It’s still not as much as it has been historically. But that’s partially due to the regulation that has been added to the banking sector to make it a safer place longer term and to put the U.S. a little bit on firmer footing.

So, I think it would be highly unlikely, at least at this point, that the Federal Reserve would switch course and move to lower, negative interest rates.

Ron: Also, I think it’s questionable whether it’s working; when Japan made the move, the yen strengthened by more than 5 percent. We saw more volatility in the TOPIX. It’s not clear that it’s actually working, although you never know because you don’t know what would have happened if they hadn’t done it.

Mark: To the everyday person who has some money in the bank, what does this mean to them? I mean, Japan has it, the Euro Zone’s had it for a couple of years.

Ron: One impact that I don’t think people are thinking about: If the U.S. really implemented negative interest rates, it could be the end of the money funds. So you wouldn’t have money market funds anymore, and that could be a very real impact, and I guess everybody would have their money in government-guaranteed accounts. But it also really hits retirees because your rates and the amount of returns and assumptions they’ve had in their financial plans could, in fact, become obsolete.

I want to go back to this point about whether it will happen. I have an analogy for you, and it’s the Zika virus. One of the ways being discussed to stop the Zika virus is eliminating the mosquito population. The problem is that they have no idea what the potential side effects of that would be.

If you start listing the potential side effects of negative rates, it gets a little bit alarming. So, one we just touched on, which is the effect on retirees: the fact that savers or ordinary individuals could start pulling money out of their bank and just putting it in the mattress. We could go back to zombie lending.

Think Japan in the 1990s: You’re starting to lend money, banks are lending money without real underwriting.

Or think sub-prime if we go a little bit later in history. The distortion of risk pricing could go even further than what we’ve seen right now, killing bank profitability.

The money markets that I just mentioned: companies taking their cash and buying back stock even more than they have already. So companies could leverage themselves up, and who cares if they get downgraded? Because the cost of borrowing is so low they probably don’t even care if their debt ratings are lowered.

So those are all things that I think are a problem. On top of that is the psychology. Does a negative rate send the signal that the central bank or the Fed really has no confidence in our economy? So that would be the psychology of it, all bad.

Hear more from Ron and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at:

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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