BlackRock CEO Larry Fink says negative interest rates are lining up savers and the economy for “potentially dangerous financial and economic consequences.”
In his annual letter to shareholders published Monday, the head of the world’s largest investor singled out the risk of sub-zero rates on the economy.
Japan and some countries in Europe have lowered benchmark interest rates below zero to encourage borrowing and spending, and so stimulate their economies.
In short, Fink argued that the lower rates are, the more money savers need to put aside to meet their retirement income and other goals.
This in turn lowers how much discretionary income they have left to spend. And as the backbone of the US economy, lower consumer spending could be a drag on growth.
Here’s Fink (emphasis ours):
Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future. For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.
This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.
The Federal Reserve has said it has considered whether negative rates would work in the US as a monetary policy tool, although it’s unlikely it would resort to using them.