November 28, 2016

Historically speaking, an average economic expansion lasts 50 months, while an average recession lasts 10 months.

The Great Recession ended in June 2009, putting us in the 90th month of expansion. History would suggest we’re nearing the end of this cycle and will see a recession soon, perhaps within the next two years.

This is particularly interesting when considered in the context of interest rates. The Federal Reserve generally lowers rates during recessions, often by 5 percent, to spur economic activity. In such an environment, it’s cheaper to borrow and not as lucrative to save in interest-bearing accounts.

The Fed Funds Rate – the rate at which banks borrow, and the driver of other interest rates – currently stands at 0.5 percent. If the Fed lowers rates by 5 percent, that puts the Fed Funds Rate at -4.5 percent – or squarely into a Negative Interest Rate Policy (NIRP)But if you believe the September dot plot forecast, the rate will rise to 3 percent by January 2018.

I wouldn’t hold my breath on that. We were supposed to have multiple rate increases in 2016 and thus far there have been none.

Still, if we assume a recession begins and rates are around 3 percent, with a subsequent 5 percent reduction over 10 months, we’ll see NIRP in 2018.

A NIRP is meant to induce consumer spending because deposits will earn nothing or lose value. It’s already happening in German, Japan, Denmark, Sweden and Switzerland.

Yet somehow, savings rates have hit a five-year high!

The NIRPs are scaring consumers into hoarding cash, driving the opposite of the intended outcome. Unfortunately, I think we may be headed for a similar path domestically. Watch out folks – it’s probably coming soon to a bank near you!