The Federal Reserve’s (FED) primary tool for influencing the economy has historically been interest rates.  If inflation rises too fast or the economy starts to overheat, the FED raises interest rates to make borrowing and spending more costly to slow demand and allow activity to return to normal.  And, if growth becomes too slow or if a recession appears on the horizon, the FED lowers interest rates to stimulate demand and return growth to normal.  So, what rate of growth is normal?

From 1947 to 2015, U.S. Gross Domestic Product (GDP)1 grew at an average compound rate of 3.24% annually.  But, in the 7 years since the end of the “Great Recession” of 2007-2009, growth has averaged only 2.20% annually, some 1/3 less than our long-term average rate.  With growth that far below normal, the FED has been making, what we consider to be heroic efforts, to stimulate the economy.2

Their first step was to lower the Federal Funds Rate3 from 5.25% in September 2007 all the way down to an unprecedented level of 0% – ¼ % in December 2008, and leave the rate at that level for the next 7 years.  When this failed to spark a return to normal, the FED adopted an unconventional new stimulus measure called Quantitative Easing (QE).  Through QE, the FED bought government bonds from commercial banks4 and paid for the bonds by adding reserves to the banks’ accounts at the FED.  Between December 2008 and October, 2014, the FED bought roughly $3.5 trillion in bonds from the banks and added the $3.5 trillion to the banks’ reserves at the FED.  The idea behind QE was that the banks, rather than letting the funds sit idly at the FED, would lend the money out to businesses and individuals.  There borrowers would then spend and invest the money, sparking a business recovery and a return to normal economic growth.  But, for whatever reasons, the banks did not lend the money out.  As of March 2, 2016, the banks had $2.48 trillion, equivalent to over 70% of the FED’s total bond purchases, sitting unused in their accounts at the FED5.



With both 0% interest rates and QE having failed to return the economy to normal, and, with no help in sight from Congress with fiscal policy6, the FED may now consider another unconventional option that was initiated by the European Central Bank (ECB)7, almost 2 years ago.  Called a negative interest rate policy, it is essentially a harsher (on the banks) version of QE.  Using a negative interest policy, the FED would charge the banks interest on the funds they leave on deposit.  The FED currently pays the banks 0.50% annual interest on their deposits.

Presumably, to avoid the FED’s interest charge, the banks would remove their unused deposits from the FED and finally, at long last, lend the money out and spark an economic revival.  However, a look at how a negative interest rate policy has worked in Europe over the past 2 years is not encouraging.  According to the International Monetary Fund (IMF), the Euro-Zone grew at 0.90% in 2014, 1.50% in 2015, and is expected to grow at only 1.70% in both 2016 and 2017.  Their unemployment rate is still well over 10% and last month the area fell into deflation as their consumer-priced index dropped 0.20% below the previous year’s level.  In addition, $2.5 trillion of Euro-area government bonds are now yielding negative interest rates.8

We doubt that this is an achievement which will convince the FED to adopt a negative interest rate policy.  So, how do we get out of our 2.0% growth mode?  The boost the economy really needs has to come from fiscal policy – tax, spending, and regulatory reform – which is controlled by a dysfunctional Congress and a lame duck President.  So, that is a “wait until next year” hope at best.

Bill Boyd

Bill Boyd, CFA


The opinions voiced in this material are for general information only. Economic forecasts set forth may not develop as predicted.





  • GDP is the total value of everything produced by an economy.
  • Bureau of Economic Analysis data
  • Federal funds are deposits held at the FED by commercial banks. The federal funds rate is the interest rate the banks pay to borrow those funds from each other.  The rate is determined by FED policy.
  • Banks which deal with the public. We have over 5,300 commercial banks according to the FED.
  • Federal Reserve financial statement issued 3/2/2016.
  • “Fiscal Policy” deals with taxes, spending and regulation and is controlled by Congress and the President. “Monetary Policy” has to do with interest rates, money supply, and currency and is determined by the Federal Reserve.
  • The ECB is the monetary authority for the 19 European countries that use the Euro as their currency.
  • Deflation is an overall decline in prices as opposed to inflation which is a general rise in prices. Most central banks, including the FED, have an inflation target of around 2.0% annually.