Real interest rates have turned negative in some parts of the developed world, and that could mean trouble for the global financial system.
Nominal short-term rates already have turned negative in Switzerland and Germany.
In the United States, 5-year Treasurys yield 1.54 percent. With consumer price inflation totaling 1.6 percent last year, that puts the real yield, which equals the nominal yield minus inflation, in negative territory.
"To the long list of economic mysteries can now be added interest rates," writes Washington Post columnist Robert Samuelson
. "They've been at rock bottom, as everyone knows. But now we've encountered something novel: negative interest rates."
Actually, it's not that mysterious. Economic sluggishness overseas is pushing central banks there to cut interest rates. This pours money into the financial markets, ironically pushing down yields.
"I don't understand why anyone would put up with negative interest rates," Richard Sylla, a financial historian at New York University, tells Samuelson. "You could do better by holding cash."
The danger: "What happens if governments or corporations begin selling bonds that start with negative rates?" Samuelson asks. "Then we're in completely unchartered waters."
As for the Federal Reserve, "I don't think the Fed will raise rates at all in 2015, owing to a weakening world economy and a strengthening U.S. dollar," star CNBC commentator Ron Insana
writes in a commentary for CNBC.
"However, if the Fed believes the normalization process should begin this year, I would suggest an even more modest proposal that might allow the central bank to gently test the market and economic waters."
The Fed's federal funds rate target has stood at a record low of zero to 0.25 percent since December 2008.
Insana's idea: "the Fed could lift the floor of the fed funds target to the current effective rate of 0.125 percent, while leaving the ceiling at 0.25 percent," he suggests.
"The snugging of policy would represent a first step in normalization but would allow the Fed the luxury of monitoring the economy and market's response to that move toward normalization."
If things go well, the Fed could continue to gradually increase rates, Insana notes. If not, it could back off.
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