How Can Interest Rates Go Lower Than Zero?

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After years of quantitative easing, many of the world’s leading economies have begun to transition away from near zero interest rates. In December 2015, the Federal Reserve announced they would be raising interest rates and followed through in January 2016. Raising interest rates indicate to the world that economic growth is stabilizing and avoids inflating a bubble of cheap credit. While it was only a matter of time before the United States raised interest rates, some experts believe this hike was premature. The interest rate hike, amongst many other factors, is often pointed to when trying to explain the volatility that has shaken the global economy over these early weeks of 2016. Consequently, some economists are insisting the Fed should have moved interest rates down instead of up. Conventional wisdom would ask, “how can interest rates go lower than zero?”, but in this day in age, some economies are beginning to experiment with negative interest rates.

Negative Interest Rates

Following the 2008 Financial Crisis, economies around the world enacted quantitative easing to effectively lower interest rates while also producing inflation. Theoretically low interest rates aim to stimulate the economy by promoting consumer spending and borrowing over savings. Consumers can borrow at such low costs that purchasing everything on credit becomes more attractive than buying it outright. Typically in a low interest rate environment, consumers will purchase new homes, automobiles or

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