President’s Corner – NIRP

If you liked ZIRP, you’ll love NIRP. From the beginning of the Great Recession in 2007, interest rates decreased to almost zero. The Federal Reserve employed a strategy called ZIRP (Zero Interest Rate Policy), a method of stimulating economic growth while keeping interest rates close to zero. Even with the Fed raising rates 1/4% in December, ZIRP is still in effect.

How’s that working out for you, Fed board members? The answer is, not much. Economic growth has been below historical growth since the most recent recession. Many economists think that lower growth is the “new normal” which we can expect in the future, regardless of which economic levers the central bank’s “Gang of Nine” pulls.

Now, for the first time in American history, the Fed is considering NIRP (Negative Interest Rate Policy) which means Fed depositors, generally banks and some of the larger credit unions, will pay to keep their money on deposit instead of receiving any positive interest. The Fed is trying to incentivize banks and credit unions to lend more which will lead to hopefully stimulating the economy. Unfortunately, compliance regulations heaped on by state and federal governments are hampering loan growth. In particular, new mortgage loan documentation has made financing a home more complicated.

There is international precedent for NIRP. Switzerland implemented NIRP in the 1970s to counteract its currency’s rapid appreciation. Sweden and Denmark used negative interest rates to slow down money flowing into their economy at the beginning of this century. More recently, the European Central Bank instituted NIRP to prevent the Eurozone from circling the deflationary drain.

It is doubtful that banks and credit unions will charge their customers and members for deposited funds. Some may increase loan rates and charge additional fees to make up the revenue shortfall. Money market funds may “break the buck” by returning less than $1.00 per share.

We’ve already seen significant volatility in the stock and bond markets and oil prices in the first month and a half of 2016. It’s becoming clearer that a bear market and possible recession are in the near future. No one knows how ZIRP or NIRP factor into this volatility, or if the volatility factors into Fed decisions. One thing we do know is that it won’t be boring.

David M. Green

(925) 335-3802