Negative interest rates can't be ruled out, analyst warns

Credit unions could soon face the prospect of negative interest rates.

That warning comes courtesy of Mark Wert, a senior advisor at Catalyst Strategic Solutions, a division of Catalyst Corporate Federal Credit Union. With the nation suffering from a recession in the midst of a pandemic and interest rates already near zero, Wert’s wrote in a recent blog post, “As much as we want to deny the possibility of negative interest rates, the notion cannot be completely ruled out within the current economic climate.”

That echoes comments from other economists, including Yi Wen of the Federal Reserve Bank of St. Louis.

Wert questions whether or not credit unions and the wider financial services world are ready for the possibility of the Fed taking its benchmark rate below zero and the impact that would have not just on consumers but on financial institutions' operations.

"Similar to the Y2K scare at the dawn of the millennium, it’s a question of whether or not your systems can handle negative rates," Wert wrote. "Sure, you can charge fees on zero-interest-bearing deposit accounts to create negative returns, but can your credit union model its balance sheet using negative rates? Are you able to offer members loans at negative rates? What mechanics would it require?"

Wert added that while some nations in Europe and Asia have some experience with this, “we don’t know how negative rates will truly impact different economies. This leads to a plethora of questions, and negative rates have not been battle tested long enough to help answer any of them.”

The nation got close to negative rates in the aftermath of the Great Recession, wrote Wert, but businesses were prepared and caught a break thanks to an improving economy.

“This time,” he said, “we might not get that break.”