Are we facing the Fed's negative interest rate and an inflation?

Published on: 14-May-2020
Category: Trading
Last updated: 14-May-2020

Are we facing the Fed's negative interest rate and an inflation?

There is speculation in the financial markets as to whether the Federal Reserve will cut its key interest rates further to the negative. It is seen as the last resort to stabilize the economy, but Fed leader Jerome Powell is not convinced. Even US President Donald Trump has often asked central bankers to introduce negative interest rates. But Powell remains skeptical and does not see the lowering of negative interest rates as helpful for the economy. So far, he has not commented on the subject. Other currency keepers were concerned about a turbulent credit market after the introduction of sub-zero interest rates. The Fed's base rate is currently zero to 0.25 percent.

But the likelihood of a further cut in interest rates is increasing. Bank of America has provided data that the rate of interest rate swap options in the United States is 23 percent likely to cause base rates to turn negative this year. Last week the figure was only nine percent. Experts already see speculation as dangerous for the US dollar.

While the central banks of the ECB, Switzerland or Japan have already cut their key interest rates to below zero, some economists fear inflation. The financial institutes always pump money into the economy and the prices increase. But the current crisis is not like the 2008/2009 financial crisis. According to experts, deflation can also occur in the short to medium term, after which inflation can then occur. With deflation, goods and services are becoming cheaper and the purchasing power of money is increasing. If people could then buy more of their money, many would also think about saving. Consumer spending is declining, demand is falling, and companies are also delaying investments to get more for their money. All of this can lead to a drop in profits and, accordingly, an overall economic disaster. But in the long run, the corona crisis is more likely to lead to inflation. The central banks bring money to the market by constantly buying new bonds and the states are also trying to help the economy with more and more money. But the difference to previous crises is that not only does the demand drop, but the supply also drops significantly. The question now is which side will recover first.



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