Zero-range interest rates have been an economic reality since the financial panic of 2008. During that time, central bank authorities dramatically lowered borrowing costs in order to boost lending and help imperiled banks survive the turbulence that followed.
However, in the nearly five years since interest rates dropped, individuals with retirement or savings accounts have been battered due to the effective lack of accrual. Older folks who rely on fixed sources of income have been starved financially, despite assurances that one day, interest rates would rise. It seems that the opposite may be occurring, as Mario Draghi, the head of the European Central Bank (ECB) – which often works closely with the U.S. Federal Reserve on important economic matters – broached the idea of experimenting with negative interest rates to boost lending.
During a press conference on May 2, Draghi was questioned about the reasons why major banks prefer to "park" their reserves at the ECB as opposed to lending them out into the wider economy. The central bank chief acknowledged this problem and said that he was "technically ready" to implement negative deposit rates through the eurozone.
This line of thinking, as reported by the U.K.-based Independent, a European news source, has been previously explored by officials from the Bank of England in a bid to spur loan activity outside of the eurozone. Parliamentary ministers from both sides of the political spectrum were quick to attack the notion, arguing that savers would be punished even further.
While it's not clear whether or not these ideas will be utilized in the United States, the level of cooperation between the ECB and the Fed suggests that it could be possible. Older Americans should heed these warnings and move away from fixed-income retirement plans and pursue other means of revenue, including cash flow real estate.