The madness of negative interest rates and why you should care

Two prevalent items have surfaced in the first quarter of 2016 – market volatility and questions on negative interest rates. The two are very much interrelated and have become a hot subject for discussion with credit union management teams, directors and even members. This article will simplify the complex topic of a negative interest rate policy (NIRP) by discussing who, what, how, and why at a macro level.

Question: Why are we hearing about negative interest rates?

The possibility that at some point over the next few years our economy will slow and reenter recession cannot be ruled out. Sure, the U.S. economy is currently growing, jobs are being created and inflation seems to be moving in the desired direction. However, three noteworthy events have occurred since the FOMC voted unanimously to hike short-term rates in December 2015: 1) the European Central Bank further cut rates into negative territory; 2) the Bank of Japan adopted negative interest rates; and 3) the Federal Reserve Bank published their annual stress tests for the largest institutions which included a severely adverse scenario with negative interest rates here in the U.S. These three items are eye-opening in magnitude and present meaningful downside risk to the economic health of the U.S.; hence the market volatility thus far in 2016. Vigilance is clearly warranted given that these risks could serve to further erode credit union margins.

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