Negative Rates ‘Dirt Sandwich’ Seen as Difficult to Swallow

  • Voya strategist says policy encourages people to hoard money
  • Negative yields would paralyze U.S. investors, she says

Is Cheap Money a Reason to Boost Rates?

Central bankers globally need to realize the risks that extreme monetary policies will backfire, according to Voya Financial Inc.’s Karyn Cavanaugh.

“Negative rates are turning out to be a dirt sandwich, especially for Japan,” Cavanaugh, who works as senior market strategist at the insurer’s asset manager, said Wednesday in an interview at Bloomberg headquarters in New York. “They thought that that was going to get people out spending. And what happened is they got people to go and buy safes and put money into their safes and hoard money.”

Policy makers from Japan and the European Central Bank have sought to stoke economic growth by implementing negative interest rates, betting that the strategy will encourage spending rather than saving. That’s caused firms such as insurer Munich Re to find ways to store cash so they can avoid the penalty caused by negative yields on debt, while Japanese banks have turned to derivatives to lessen the pain.

The Federal Reserve, which raised rates in December, has held off on further hikes as geopolitical uncertainty strains global economies. Fed Chair Janet Yellen is running out of firepower to encourage growth, and forcing rates to less than zero in the U.S. would prove disastrous, Cavanaugh said. Yellen has said that the bank is not contemplating such a policy.

For more on negative interest rates, click here.

“Psychologically, it just wouldn’t go over here in the U.S.,” Cavanaugh said. “I think it would freak people out to the point of paralysis, and it would do more damage to the economy than they could even imagine.”

Democracies are relying too much on central banks to stimulate their economies, she said, adding that governments should help out by pursuing prudent fiscal stimulus measures and adjusting tax policy.

“Too many people are thinking the Fed can do things that they really can’t do,” she said.

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