Believe this to be true stock market bulls: you don’t want 0% interest rates from the Federal Reserve. Or as they say in some wonky circles on Wall Street: “Negative Interest Rate Policy (NIRP).”
Sure, it’s enticing to think about the prospect of buying momentum stocks such as Netflix (NFLX), Amazon (AMZN), Salesforce (CRM) and Beyond Meat (BYND) on cheap credit to juice the prospect for robust returns. But if you think about it, none of those often high-flying stocks would likely be hot trades in the world of NIRP because the U.S. economy would probably be sucking wind.
“The necessary condition for negative interest rates to happen is that we have got to go into a recession. The first thing that would happen is that the Fed would cut rates all the way back to zero. The second thing that would happen is that they would start to ramp up quantitative easing and then potentially after that, you could go negative,” acting Wells Fargo chief economist Jay Bryson said on Yahoo Finance’s ‘The First Trade.’
Bryson continued, “Knowing what I know today, the probability of that is certainly not zero, but I think it’s pretty low as well. I think you would have to get yourself into a fairly deep recession for us to even start thinking about going to zero.”
Yet here we are investors, staring down the barrel of 0% interest rates in the U.S. by mid-2020.
The Fed cut interest rates again by 25 basis points to a new target range of 1.75% to 2% on Wednesday. It represented the second “insurance rate cut” by the Fed this year, and comes on the heels of slowdowns in U.S. manufacturing and the job market in large part from effects of the U.S.-China trade war.
Negative rates haven’t really boost economies
The market should ask itself if NIRP by the European Central Bank and the Bank of Japan have worked at all.
ECB chief Mario Draghi just slashed interest rates to -0.5% and left the door open to doing more. European Union economies are barely growing despite the rock bottom rates. Gross Domestic Product fell 0.1% in Germany in the second quarter alone.
On Thursday, the Bank of Japan held rates steady at -0.1%. It, too, signaled it would be willing to do more easing to try and jump start economic growth. After years of a NIRP policy, Japan was only able to eke out 1.8% GDP growth in the second quarter.
That’s awful considering those low interest rates. But again, it reflects both economies not being in good shape.
“We have joked internally that NIRP is the upside down of the ‘Stranger Things’ hit on Netflix. It’s unfortunate because once you get to the upside down world of NIRP, it’s very difficult to get your way out of it. We are seeing that with the ECB and certainly with the Bank of Japan,” says PNC Financial Chief Investment Officer Amanda Agati.
In the end, be careful what you wish for from the Fed.