What happens when a central bank has exhausted most of the conventional methods to jumpstart economic growth? Well, experts start to consider extreme and unconventional methods, which is what the conversation is sounding like from the Federal Reserve Board.
So far, the Fed has pursued two major avenues to promote economic growth. At the height of the recession, the Fed lowered interest rates to near zero percent and enacted the American Recovery and Reinvestment Act, which injected trillions of dollars of stimulus into the economy. Since then, the stimulus program has ended and most of the world expects the Federal Reserve to raise interest rates back to normal levels. When Fed Chairwoman Janet Yellen had an opportunity to do this in September, she decided against raising rates. What gives?
Her decision is an indicator the nation’s top economists do not think the U.S. economy can handle a rise in rates. In fact, the conversation is turning toward exploring extreme measures to help drive economic growth.
One of these measures includes lowering interest rates below zero percent, effectively charging savers who park their assets in the safety of their bank accounts. The thinking is to push savers out of safe investments and into the market, which could lengthen the bull market by pushing asset prices higher. The problem with this measure is that even though asset prices might increase, investors who are forced into the marketplace may be taking on more risk than they want or expect. If markets deteriorate, investors who have conservative risk temperaments could experience investment loss more typical of aggressive investors.
clearTREND research by our firm in Appleton indicates downward trends in most market segments except the NASDAQ index. Our U.S. Economic Health Index shows 15 percent of U.S. sectors are expanding while 73 percent are contracting.
“This is the largest number of contracting economic sectors we’ve seen since the inception of the U.S. Economic Health Index,” says Alexander Hunt, advisor to private clients and retirement plans. “As an indicator that the economy is on uneven footing, it’s understandable that the Fed is exploring extreme options like negative rates to promote economic growth.”
View this month’s economic data in our digital issue.