I hope you’ve had a great week. As I consider which topics you may find most valuable to discuss, I ponder the usual list of subjects: the stock market, long-term care, Social Security, pensions. But every now and then, the truly unusual appears on my radar, begging to be shared and expounded upon. Today, the topic is negative interest rates. More specifically, we’re going to take a deep dive into NIRP.
What exactly is NIRP? Well, a Negative Interest Rate Policy is an unconventional monetary policy that sets interest rates to a negative value, below zero percent. In practice, central banks actually charge depositors to pay the bank to keep their money on deposit. Crazy, right? Why would you pay to keep your money at the bank?
When the economy experiences deflation (the opposite of inflation), asset values go down in value. In response, people tend to hoard money, rather than spend and invest it. The result is a slowing of demand for goods and services in the economy, which further results in more deflation. It’s a downward spiral, if you will. To combat this, the central banks (The Fed) use whatever tools they have available to encourage people to spend and invest, in order to grow the economy. When interest rates are zero, the only way to go down further is to go negative.
As we sit here today, we can see the economy and the markets have come a long way from the crash of 2008, but there’s still a desire for more growth to keep the momentum going. This is why the Fed is actually considering a NIRP in the near future. And if you have to pay to keep money in the bank, well, you might as well spend it or put it to work in the stock market, right?
Of course, a strategy such as this has consequences. While a complete breakdown of all of the potential outcomes is outside the scope of this newsletter, consider just a few points before heading into the weekend.
- If interest rates go negative for a while, bonds and bond funds are likely to increase in value. If a bond you own pays a positive rate of interest, it becomes more valuable to others in a negative interest rate environment.
- If you have to pay to keep deposits at the bank, you may consider a more strategic way to manage your emergency and liquid funds. One example is to move savings into bonds and even stock funds. Yes, this is precisely what the Fed wants, which is why it might be valuable to understand how this works to your benefit.
- A move toward NIRP is a serious one, which may indicate a trend toward even greater volatility in all markets, stock and bond. Long-term, you’d be wise to maintain some level of exposure to stocks and even long-term care protection. After all, the Fed is trying to inspire inflation (rises in prices) and the biggest inflationary cost for retirees is medical and nursing care. Moving money from savings to long-term care protection may be a wise strategy to consider.
As with all of these scenarios, the right move for you is likely not the right move for your friend or neighbor. Knowing that a NIRP is being discussed should not alarm you, but instead should inspire you to review your planning.
As you look ahead, consider how you might turn a negative into a positive. Let me know what questions you may have, and we’ll do whatever we can to help you.
By the way, in case you missed last week’s news, we moved to the suite next door. The move went very well and we’re loving the new space. So when you come to see us, turn right at our old front door (now Chamberlain Law Group) and you’ll be headed in the right direction.
All the best,
Adam Cufr, RICP®
