Trump's call for negative rates threatens savers

WASHINGTON (Reuters) – Pressure from US President Donald Trump in favor of low interest rates hit a new high on Wednesday when he urged the Federal Reserve to take the extraordinary step of bringing them back to a new level. level below zero.

Outside of Washington, Fed decision makers often have to deal with the opposite complaint. Interest rates are already too low, say Americans to Fed officials when they speak in the Rotary clubs and chambers of commerce of the country. Savers, particularly those nearing retirement age, are not taking enough advantage of their savings accounts or fixed income investments.

The negative rates applied by Trump, already in place in parts of Europe and Japan, would have the effect of charging people who save money and rewarding those who are able and willing to borrow. They were so unpopular in Japan that they became a hot topic in talk shows and tabloids, highlighting consumers buying safes to keep their money at home rather than at banks. .

Fed policymakers have already deemed this unnecessary, given the relatively strong, risky and politically unpopular economy. US savings rates are almost three times higher than they were before the Great Recession.

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Relatively low interest rates have helped homebuyers and businesses invest in new equipment, for example, but they have dampened the returns of many bank accounts and even certificates of deposit, reducing household savings after adjusting for inflation.

"What happens when you retire and you have your stack and you're trying to live off your stack?" Explains Alicia Munnell, a professor at the Carroll School of Management at Boston College. "At this point, you want the rates to be higher. People in withdrawal phase would unequivocally benefit from higher rates. "

Richer investors can offset low savings rates by investing in stocks or other assets with higher risk, higher returns. Some savvy Americans have been so eager to get a decent rate on their savings that they have asked for Treasury bills directly at government auctions, with a record number of rate hikes and so on. from the rise in the Fed's interest rates.

Investors with a small nest egg or a less developed financial know-how may have few savings options other than a standard savings account or a savings account. low-yielding treasury bond. They can not save their way to wealth in a low interest rate environment.

"Low rates are destroying economic equality," said Karen Petrou, who heads the policy analysis firm Federal Financial Analytics.

"Negative rates would be even worse," because they would punish middle-income people, especially those looking to save for retirement, Petrou said. Poor Americans who already spend what they earn or get in government programs may be relatively unaffected because they initially have little savings.

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EDF CUTS HIT RETIRED

Even with little chance of the United States quickly adopting negative interest rates, savers, and especially retirees, can probably say goodbye to higher returns this year.

The slowdown in global growth and the intensification of the US-China trade war led Fed officials to cut interest rates for the first time in 10 years in July. Another reduction is expected when they meet next week.

As Americans approach retirement age, many have traditionally relied heavily on bonds to stabilize their incomes. For example, in retirement savings portfolios, Fidelity allocates only 16% of bonds 15 years after retirement and 37% of bonds less than 5 years old. If these bonds have negative returns, the heavily obliged portfolios suffer.

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The Federal Reserve has lowered interest rates from a high of 5.25% to just over zero in order to stimulate the economy during the last recession and has managed to raise interest rates. of interest at just over 2% since then.

Central banks that have adopted negative rates have only done so because, unlike the United States, they have not been able to significantly raise their interest rates as a result of the financial crisis.

Federal Reserve Chairman Jerome Powell is keenly aware of the savers' concerns, judging from what he said when he became head of the world's most powerful central bank.

"If you are really dependent on fixed income, bank deposits and … short-term interest rates, it's a burden for you," he admitted at of his confirmation hearing.