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Can We Have Negative Interest Rates?

by Peter G. Miller
March 20th, 2008

Since August the Federal Reserve has reduced the discount rate and federal funds rate six times, going from 6 percent to 2.25 percent. These rate reductions impact short-term interest levels which helps those with home equity loans, but not long-term rates such as mortgages.

(Think about it — 30-year fixed-rate loans were at 6.13 plus .5 points last week versus 6.62 percent plus .4 points on August 16th, according to Freddie Mac. That’s a drop, but nothing like short-term rates controlled by the Fed.)

The question is: How low can the Fed go?

It might seem as if they Fed can only drop short-term rates to zero, but actually it’s possible to have negative interest rates. As Forbes magazine has reported:

“T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: A Brief History of Stock Fads, September 14, 1992)

In other words, if you bought a T-bill for $1,000 at the end of the term you would get back less — and you knew you would get back less!

Why would sane folks make such an investment decision? Because they might lose even more if they did not buy T-bills at the time.

Let’s hope that such odd-ball economics do not become a reality in our time.

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This entry was posted on Thursday, March 20th, 2008 at 3:33 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Can We Have Negative Interest Rates?”

  1. Ron Borg Says:

    Multi-billion dollar bailouts and the printing presses running overtime. Let’s watch the Fed once again over step their limits. Does anyone see that the Fed’s meddling caused the housing boom by keeping interest rates at extremely low levels, then caused the bust by raising interest rates what – 17 times over an 18 month period? And while interest rates were at those low levels brokers and lenders convinced millions of borrowers to go with ARM’s. Then the Fed drastically pushed rates up. Tell me… was it manipulation or is the Fed really that inept?

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