The Federal Reserve meets next week and is expected to cut interest rates by a quarter-point. But that apparently will not be enough for President Trump.
Trump took to Twitter this week to castigate a “boneheaded” Fed for keeping interest rates too high, suggesting they should be at 0 percent or lower. Several European countries have cut rates to negative yields and in a series of tweets, the president suggested that would be a good move for the U.S. since it would make it cheaper to finance the considerable U.S. debt.
"The Federal Reserve should get our interest rates down to ZERO, or less," the president wrote in a tweet.
But European economies are gasping for air while the U.S. economy appears to still be growing. Most mainstream economists say there is very little economic rationale for negative U.S. interest rates.
After raising rates aggressively last year, the Fed has cut its key federal funds interest rate to a range of 2 percent to 2.25 percent. Historically, that’s very low. Cutting rates is normally something done when an economy is faltering, but economists say there has been little evidence of that in the U.S.
Critics charge negative rates hurt banks
There’s also a growing number of economists who say negative interest rates don’t spur an economy as they are intended to do. These critics argue that negative rates end up hurting banks and reducing inflation, with the effect of handcuffing economic growth.
"Negative interest rates have failed in Europe and Japan," Richard Fisher, former president of the Dallas Federal Reserve Bank, told CNN.
Trump’s tweet once again rattled the markets as it suggested the White House is concerned about the U.S. economy. If the economy is on sound footing, market analysts reasoned, negative interest rates aren’t necessary.
Critics of negative interest rates often compare them to a tax on banks. Banks normally collect interest payments when they deposit their reserves at central banks like the Fed. But when negative rates are in effect, the banks have to pay central banks for holding onto their cash.
It’s a measure that is supposed to encourage banks to lend money but in practice, critics say it hasn’t worked that way.
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