Why the U.S. Has Shunned Negative Interest Rates

Investors betting on interest rates have signaled that the U.S. Federal Reserve could push its benchmark rate below zero for the first time ever within the next year. While policy makers have tried to rein in such speculation, there’s an undercurrent of worry among investors that they should protect against this scenario as the global economy reels from the pandemic. Sub-zero central-bank rates have been a reality for years in Europe and Japan, and the Bank of England isn’t ruling them out. Fed officials have consistently opposed going negative. But that hasn’t stopped the gyrations in derivatives markets from driving the debate.

The idea is to provide another spur to the economy by stimulating more lending. The theory goes that by introducing sub-zero benchmark rates, households and consumers will be incentivized to borrow and spend. Investors would shift purchasing to other short-term or riskier assets and the rates on those assets would fall, making borrowing cheaper. Whether that’s worked in the regions that have tried it, or whether the disruption of negative rates outweigh their benefits, is a matter of hot debate. President Donald Trump has regularly heckled the Fed to venture below zero -- saying doing so would be a “gift” to the U.S. economy.