Veronica Gomez-Quintero

Article Review
Macroeconomics
March 6th, 2015

Should interest rates go negative in the U.S.?

Author: Paul R LeMonica

Introduction:
I have found the article titled Should interest rates go negative in the U.S.? By Paul R
LeMonica on CNN Money to be very interesting. The article discusses many valid and
interesting points. The Federal Reserve otherwise known as "The Fed" discusses the possibility
of an increase in interest rates as well as motivations for a reduced or negative interest rate. What
does that mean for us? A macroeconomic perspective is a view of the larger picture, of the big
picture if you will. It is important to understand both the benefits and implications of a higher
interest rate and a negative interest rate. A negative interest rate would affect many aspects of the
U.S. economy as well as the economy of other countries. Lets take a closer look at the different
aspects.

Article Summary
The article begins by stating that The Federal Reserve wimped out and didn't raise
interest rates Thursday, citing concerns about China and other global factors. Most economists
believe that the interest rate will rise in the future, in fact in the very near future.

One member of the Feds seven members believes that interest rates should move to a
negative interest rate. Basically, banks would pay borrowers to borrow money rather than
borrowers paying a bank to borrow money. It is believed that the negative interest rates would
encourage consumers to save less and actually spend more. However, there are negatives to
consider when implementing negative interest rates, such as weakened currency. In a press
conference, the Fed chair Janet Yellen stated "Negative interest rates was not something we
considered very seriously at all." Although the economy has continued to grow at a slow pace, it
is believed that negative interest rates would make very little, if any, in the economy.
It is possible that in extreme situations, negative interest rates may be considered to boost
consumer spending and influence the economy. In fact, the article quoted Keith Hembre, who is
the chief economist at Nuveen "Negatives rates are not out of the realm of possibility under
really adverse circumstances. But we're not there yet. Additionally, the article indicated that
Hembre believed the "outspoken about being more urgent about the Fed getting back to its 2%
inflation target." The Fed has a desired inflation rate of 2% because at this rate

Interpretation
First and foremost, who is the Federal Reserve and what do they do? The Federal Reserve
is the U.S. central bank. The Fed's mandate is "to promote sustainable growth, high levels of
employment, stability of prices to help preserve the purchasing power of the dollar and moderate
long-term interest rates."
The article mentions the Feds desired inflation. Its important to understand both sides of
inflation and what they actually mean. Inflation is a consistent increase in the price level and a
reduced amount of purchasing power or value of money. What I mean when I say that we must

understand both sides of inflation is that inflation for a borrower means something different than
inflation for a lender. For example, if a borrower obtains a loan from a lender for an automobile
at an agreed upon interest rate. Inflation can either make this beneficial for the lender of
borrower. Deflation on the other hand is the consistent decrease in the price level. The Federal
Reserve attempts to stop, prevent or minimize severe deflation. Hyperinflation is an extremely
rapid increase in the price level. The interest rate effect is a reason that the aggregate demand
curve is downward sloping. The interest rate affect prices, as prices rise consumers demand more
money to carry out their purchases.
It is important to understand how these seemingly small pieces fit into the larger picture
and the great effect that they can have. As the article suggests, there are situations in which an
economy may find itself faced with the decision of offering negative interest rates. Current
disposable as saving. The Marginal Propensity to Consume (MPC) measures how much is
consumed rather than saved when there is a change in income and the Marginal Propensity to
Save (MPS) How much is saved, rather than consumed, when income changes. These two rates
are very important in determining how other factors may impact an economy and how much they
will impact.
In some parts of Europe, the bank rates were already zero and they became negative
sometime in 2015 as concerns about deflation kept growing. Additionally, the article states
Some European corporate bond rates, including Nestle's, even dipped to less than zero. In
these cases, the bank is essentially paying borrowers to borrow money. The current position in
the U.S. does not call for negative interest rates. However, the possibility of negative interest
rates does bring into question the stability of the economy.

Nominal interest rates are expressed in todays dollars and is adjusted for inflation.
Negative nominal interest rates essentially the person that deposits money is paying the bank to
hold those funds.
Application and Conclusion
Macroeconomics is the study of the larger picture with many many actors.
Microeconomics is the study of an individuals choices, wants, needs and things of that nature.
This helped me a great deal in understanding macroeconomics. It is very important to understand
their differences and similarities.
Five years ago I began my career with the State of Utah, specifically the Labor
Commission. My decision to seek employment elsewhere was motivated greatly by the
increasing unemployment rate and the status of the economy the time. The economy was in a
recession and my employer at the time was making many employment cuts in order to remain
profitable. When the economy is in a recession, it means that there has been economic decline
and there have been two consistent quarts in which there has been a fall in Gross Domestic
Product (GDP). In a recessionary gap, in the long-run a country is producing below its
productive potential. The output is low and unemployment is more than the natural rate of
unemployment. Unemployment happens when a person, someone in the labor force, is actively
searching for employment, however, they are unable to locate employment. A depression is an
extreme and severe recession. These both fall in the Business fluctuations, which are the ups and
downs in business activity throughout the economy. The business cycles include peaks, troughs,
recessions and expansions.
Many of my coworkers had already been laid off and they were unable to obtain
employment elsewhere. My personal fear of losing my job and later being unable to obtain

another job motivated the early change. There are different types of unemployment. Structural,
frictional and cyclical. Structural unemployment is cause by a poor match of the workers skills.
Frictional unemployment results from workers searching for appropriate job offers. This is often
a period of time in which workers remain temporarily unemployed. Cyclical unemployment is
unemployment that occurs at different period or points of a business cycle. Full employment is a
rate in which there is no cyclical unemployment. It is important to understand that not all
unemployment individuals factor into the unemployment rate. The Labor force is made up of
individuals aged 16 years or older who either have a job or are looking and available for possible
jobs. This includes the number of employed plus the number of unemployed. From this we can
derive the Labor force participation rate which is the percentage of noninstitutionalized workingage individuals who are employed or seeking employment. Full employment means that the level
of unemployment is consistent with the normal frictions of the labor market.
In 2008 the Fed reduced interest rates in order to influence the economic situation at the
time. The housing market was not in a good position. Many people had lost their homes during
this period. In 2010, I purchased my first home. The lower interest rate and the government
offered a tax incentive for first time home buyers added motivation to my desire to purchase a
home. These are examples of government intervention with fiscal policy measures.
The magical equation in macroeconomics is C +I + G + X = GDP. What does this mean
exactly? C: consumer spending, I: Interest, Government Spending, and X: Net x ports = Gross
Domestic Product. An increase in consumer spending would in turn increases the Gross
Domestic Product.
Bibliography

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Reserve Aim for 2 Percent Inflation over Time? The Federal Reserve, 26 Jan. 2015. Web.
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Hilsenrath, Jon. "Fed Cuts Rates Near Zero to Battle Slump." The Wall Street Journal. N.p., 17
Dec. 2008. Web. 5 Mar. 2016. <http://www.wsj.com/articles/SB122945283457211111>.

Irwin, Neil. "Negative 0.5% Interest Rate: Why People Are Paying to Save." The New York
Times. The New York Times, 12 Feb. 2016. Web. 06 Mar. 2016.

La Monica, Paul R. "Should Interest Rates Go Negative in the U.S.?" CNNMoney. Cable News
Network, 18 Sept. 2015. Web. 06 Mar. 2016.
<http://money.cnn.com/2015/09/18/investing/federal-reserve-fed-negative-interestrates/index.html>.

Russell, Karl, and BINYAMIN APPELBAUM. "Why the Fed Raised Interest Rates." The New
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<http://www.nytimes.com/interactive/2015/09/12/business/economy/fed-ratesexplainer.html?_r=0>.

Silver, Tisa. "How Interest Rate Cuts Affect Consumers | Investopedia." Investopedia. N.p., 19
Oct. 2008. Web. 06 Mar. 2016.

<http://www.investopedia.com/articles/economics/08/interest-rate-affectingconsumers.asp>.