Question

Should the US pursue a negative interest rate policy?

A complete answer will address the following concepts:

• What is the current macroeconomic situation in the US?
• What benefits would a negative interest rate policy have?
• What drawbacks would a negative interest rate policy have?
• Are the drawbacks worth the benefits?

  You may reference the situations in other countries if you would like (it may make answering this question easier), but it is not required. The answer only needs to be 1-2 paragraphs long.

Answer 1

Adjustment of interest rates: The current short rate is in the range of 2.0–2.25 percent, allowing the Fed fair flexibility to lower rates back to zero if appropriate.
Forward guidance: Negative interest rates are simply a form of clear forward guidance in many ways — a Fed commitment to monetary policy that is very straightforward. The Fed is more interested in a policy mix of zero interest rates with some kind of clear forward guidance, such as a pledge not to raise rates unless certain economic goals are achieved, rather than negative rates being implemented. With less uncertainty than negative interest rates, such a policy combination will likely achieve desirable economic outcomes. New asset buying program: The Fed's balance sheet currently stands at about 18% of nominal GDP, which is significantly lower than its rate of 25% in Q3 2018 and far below the current figure of 40% of the ECB. As such, the Fed has ample scope for quantitative easing, including purchasing various types of assets.

Depending on the key economic indicators, the U.S. economic outlook is favorable. The gross domestic product, which calculates the production output of the country, is the most important metric. The growth rate of GDP is expected to remain between the ideal range of 2% to 3%. It is forecast that unemployment will persist at the natural rate. Inflation and deflation is not too much. President Trump vowed to lift economic growth to 4%. That's faster than good. Growth at that speed leads to misplaced exuberance that is overconfident. It produces a boom that results in a bust that is detrimental. The reasons behind these shifts in the business cycle are supply, demand, availability of resources and the understanding of the market

The unemployment rate in 2019 will be 3.6%. It will increase slightly by 2020 to 3.7% and by 2021 to 3.8%. That's below the 6.7 percent target of the Fed. However, most growth in employment occurs in low-paid retail and food service industries. For so long, many people have been out of employment that they will never be able to return to the highly paid jobs they used to have. There has been a rise in structural unemployment. These characteristics are unique in this recovery

Usually, interest rates are believed to be the price paid for borrowing money. An annualized interest rate of 2 percent on a $100 mortgage, for instance, means that the lender must repay the initial loan amount plus an additional $2 after a full year. On the other hand, an interest rate of-2 percent means that after a year of using the $100 loan, the bank pays the borrower $2 which is counterintuitive. Although negative interest rates are a strong lending incentive, it is difficult to understand why a borrower would be able to provide funds, given that the lender is the one who takes the risk of a default on the loan.

Negative interest rates are a drastic measure that indicates that policymakers believe that Europe may fall into a vortex of deflation. In harsh economic times, when waiting for the economy to change, people and businesses tend to hold on to their money. But this action can further damage the economy, as a lack of spending contributes to additional job losses, decreases income, and increases the fears of people, giving them even more motivation to stockpile.

A negative environment of interest rates would also cause problems for individuals who store their money in banks. Usually, when interest rates are high, storing money in a check or savings account means the bank will pay interest to the depositor to store their money. A one-year deposit of $100 will turn into the next $101, and so on. This promotes depositing money, as keeping it in cash means that the owner loses interest they could gain. Now, the bank will charge the depositor with negative rates for keeping cash with them. The $100 can turn into $99 the next year, and so on.This brings us to a different issue. A negative rate of interest will punish people who are trying to save for retirement. If a retirement savings fund all of a sudden stops paying interest and instead reverses to kill the account's value, savers are left with less cash than they expected for retirement.