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Verdence: 'negative interest rates are a dangerous tool'

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(Kitco News) - The Federal Reserve is likely to avoid the much-talked-about negative interest rates to counter economic weakness, as these can be a “dangerous tool,” said Verdence Capital Advisors. The topic has been in the forefront of financial markets since the Federal fund futures have been factoring in negative rates at some point during 2021. Verdence explained how this works: banks get charged a “storage fee” instead of being paid interest when they deposit reserves with a central bank. This is meant as an incentive to get banks to lend money, and the tool has been used in other countries. However, negative rates put a strain on banks, which must make up that fee with extra charges on customers, Verdence pointed out. Impacts include lower interest rates for consumers but no interest payments for savers. They also weaken a nation’s currency. “Negative interest rates are a dangerous tool and should only be considered in a worst-case scenario,” Verdence said. “It can have negative ramifications that are difficult to unwind for banks and consumers. In the U.S., it could be detrimental to the nearly $5 trillion money-market mutual fund space.” Once an economy relies upon negative rates, such as Japan and Europe, it is difficult to escape the policy, Verdence said. “The Fed is likely to stick with using its balance sheet unless the economic environment dictates something so drastic.”

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