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Trump's call for negative prices threatens savers



WASHINGTON (Reuters) – U.S. President Donald Trump's pressure on low interest rates reached a new pitch Wednesday as he demanded the Federal Reserve take the extraordinary step of sending them below zero.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, USA, March 19, 2019. REUTERS / Leah Millis / File Photo

Out of Washington, D.C., Fed policymakers often face the opposite complaint. Interest rates are already too low, Americans say to Fed officials as they speak at Rotary Clubs and Chambers of Commerce around the country. Savers, and especially those close to retirement age, do not get enough returns from savings accounts or fixed investments.

The negative rates Trump is pushing, already in place in some parts of Europe and Japan, would effectively charge people who save their money, and reward those who are able and willing to lend. They were so unpopular in Japan that they became a hot topic of talk shows and tabloids, highlighting consumers who bought safes to stash their money at home rather than at banks.

Fed politicians have already dismissed such a move as unnecessary, given the relatively strong economy, as well as too risky and politically unpopular. US savings rates are almost three times higher than they were before the Great Recession.

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Relatively low interest rates have helped home buyers and businesses invest in new equipment, for example, but they slow down returns on many bank accounts and even certificates of deposit, hurting their household savings when adjusted for inflation.

"What happens when you retire and have your pile and try to live off your pile?" Says Alicia Munnell, a professor in the Carroll School of Management at Boston College. “At that point, you want the prices to be higher. People in the stairwells will unequivocally benefit from higher interest rates. "

Wealthier investors can make up for low savings prices by investing in shares or other assets with higher risk and higher returns. Some savvy Americans have been so eager for a decent interest rate on their savings that they have bid directly for state taxes on state auctions in a record number of interest rates, along with the Fed's rate hikes.

Investors with little nesting or less financial knowledge may see few savings options beyond a standard savings account or a low-interest government bond. It is impossible for them to save the way to wealth in a low interest rate environment.

"Low prices are devastating for financial equality," said Karen Petrou, who runs the policy analysis firm Federal Financial Analytics.

"Negative rates will be even more," because they would punish moderate income people, especially those trying to save for retirement, Petrou said. Poor Americans who already use what they earn or get through government programs can be relatively unaffected, since they have few savings to begin with.

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FED CUTS HIT RETIREES

Even with little chance of the United States transitioning to negative interest rates anytime soon, savers and especially retirees can kiss higher returns this year.

A combination of slowing global growth and an escalating trade war in the United States and China caused Fed officials to cut interest rates for the first time in ten years in July. Another cut is expected when they meet next week.

As Americans near retirement age, many have traditionally relied heavily on bonds to stabilize income. For portfolios focused on retirement savings, for example, Fidelity only awards 16% to bonds for the 15 years from retirement and 37% for those within 5 years after retirement. If these bonds have negative interest rates, bond-heavy portfolios suffer.

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The Federal Reserve cut interest rates from a high level of 5.25% to just above zero to stimulate the economy during the recent recession, and has managed to raise rates to just over 2% since time.

Central banks that have adopted negative interest rates have done so only because, unlike the United States, they have not been able to raise interest rates significantly after the financial crisis.

Federal Reserve Governor Jerome Powell is very aware of the concerns of savers, judging by comments he made when he stepped up to lead the world's most powerful central bank.

"If you really depend on a fixed income and bank deposits and … short-term interest rates, then it has been a burden for you," he admitted at his confirmation.

Reporting by Lindsay Dunsmuir, Ann Saphir, Jonnelle Marte, Howard Schneider and Jason Lange; Editing by Heather Timmons and Dan Grebler

Our Standards: The Thomson Reuters Trust Principles.

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