Could Fed Funds Rate Go Negative?

In the aftermath of both the Bank of Japan and the European Central Bank putting its key interest rates in negative territory, US banking leaders have been recently pressed about what would happen if the US Feds Fund rate was moved into the red. Keep in mind, this is nothing more than conjecture, though Federal Reserve Chair Janet Yellen recently admitted the idea has been floated.

According to PNC Bank’s chairman and CEO, Bill Demchak, “If rates go negative, consumer deposit rates go to zero and PNC would charge fees on accounts.” That’s correct. Consumers who have been used to low to no service fees on their bank accounts may have to start paying the bank in order to maintain a checking and/or savings account.

Banks are in the business of making money. If suddenly they were forced to pay consumers to take out loans and/or mortgages, they would need to recoup those costs. The best and easiest way to do that would be to increase service fees across the board for all banking customers.

The timing of this particular issue is curious, considering the Fed just raised interest rates by .25% back in mid December. That was the first rate increase since the start of the 2009 recession. Up to this point in time, it has been assumed the Feds were prepared to increase rates even further to stave off any possibility of inflation should the economy continue improving.

By indicating the idea of a negative Fed Funds rate has been considered, it could mean one of two things. The Fed board sees some troubling signs on the horizon, or they simply misread recent economic data and made a haste decision to raise rates in the first place. Either way, US consumers might want to consider the notion the economy is not yet out of the woods as previously indicated.