(Business Insider) At Berkshire Hathaway's annual investors meeting on May 2, Warren Buffett called the possibility of negative interest rates in the US the "most interesting question I've seen in economics."
"The world's been able to do it now a dozen years or so," Buffett said. "But we may be facing a period where we're testing that hypothesis that you can continue it with a lot more force than we've tested it before."
He added: "If the world becomes a world where you can issue more and more money and have negative interest rates over time, well I'd have to see it to believe it. But I've seen a little bit of it. I've been surprised, so I've been wrong so far."
Interest rates are negative in places like Japan and the eurozone, which simply means borrowers in those places are paid to hold money. In the US, the Federal Reserve's baseline interest rate has been near zero since the Federal Open Market Committee slashed it at an emergency meeting on March 15. And Fed Chair Jerome Powell said recently that they're likely to stay there.
But speculation is growing on whether the Fed's line of thought will change. Goldman Sachs said as much on Thursday, making the case that the central bank would have to consider negative rates if a second wave of the coronavirus hit the US.
In addition, futures for the Fed's overnight lending rate for January have dipped into negative territory in recent days. And President Donald Trump has applied pressure of his own, renewing calls this week for Powell and the FOMC to implement negative rates or risk putting the US at a disadvantage.
"As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the 'GIFT'. Big numbers!" the president tweeted.
But while negative interest rates are generally employed by central banks as an economic stimulant — since they encourage borrowing and spending — experts say they can also create stresses within the banking system. It changes the entire business by costing people money to store their cash in bank accounts.
If interest rates in the US do indeed go negative, how will the global landscape and investing environment change as a result?
Business Insider spoke with five experts, whose responses are provided in detail below.
Dave Nadig, chief investment officer and director of research at ETF Flow
In the short term, investors will be pushed into riskier asset classes like equities, according to Dave Nadig, the chief investment officer and director of research at ETF Flow.
"When people are sitting there saying, 'What the heck should I do with my money,' to be simplistic about it, they're evaluating what they can get out of a two-year Treasury versus what they can get out of the corporate market, versus what they could get out of stocks, commodities, bitcoin, and everything else," Nadig said.
He added: "So if in fact the [yield] curve is flat and hovering around zero, it means that literally you get nothing from being in Treasurys and therefore if you want to see any return at all you have to go to another asset class."
Richard Sichel, senior investment strategist for The Philadelphia Trust Co.
Richard Sichel, a senior investment strategist for The Philadelphia Trust Co., unpacks how to find reasonable equity investments. He sees opportunities in financially strong companies with high dividend yields that are likely to increase in coming years.
He said this group of companies included the likes of Intel, Procter & Gamble, Verizon, AbbVie, and Medtronic.
"There's money that could go or will go to stocks, and maybe to good old high dividend companies … where people are desperate to get some yield," Sichel said. "That's not an ideal situation, and they have to know what they're getting into."
He added: "The dividends are nice, but obviously they have to understand that they're raising the risk in doing that versus money markets and short-term bonds."
Mike Valletutti, hedge-fund manager at MarketModel Advisors LLC
The rush into equities outlined above would lead to market bubbles that would burst when rates eventually go positive, according to Mike Valletutti, a hedge fund manager at MarketModel Advisors LLC. He sees that as a concerning development for groups like pension funds and endowments, which will be forced into riskier assets.
"Pension funds, endowments, state entitlements — all of those have a minimum yield they have to reach, and order to do that, a large portion of that would be bonds, it would be cash, in addition to equities," Valletutti said. "If you take away the yield in bonds and cash, you're forcing them to reach for yield in other areas, and that's going to be in the stock market; it's going to be in higher-yield junkier bonds — basically riskier assets."
He added: "Rates can't be negative forever, so when they reverse, all that chase for higher risk yield, it's going to come out. So it's almost like an artificial short-term steroid boost to risk assets, but it's not quite the way you want it to go. You want growth to happen over time."
Lawrence Lepard, investment manager at Equity Management Associates LLC
Amid all the talk about negative interest rates, many experts are still skeptical. Lawrence Lepard, the investment manager at Equity Management Associates LLC, said the US dollar's status as the world's reserve currency should prevent rates from going negative. But if they do, gold may be a safe investment, he said.
"You can't really have negative rates on the reserve currency," Lepard said. "I mean the reserve currency is supposed to be the safest place to go, so if rates are negative, what do you do, right?"
He added: "I mean all these others could do negative rates if we didn't have negative rates, so if we go negative rates here, it's going to really be a problem. Gold is the solution here."
George Pearkes, macro strategist at Bespoke Investment Group
Others say interest rates going negative wouldn't change much relative to current rates.
"As we've seen in Japan, Denmark, Switzerland, and the eurozone, small degrees of negative rates are basically the same as zero rates," George Pearkes, a macro strategist at Bespoke Investment Group, said. "Focusing on the fact that they're negative isn't really worthwhile. They just provide a little extra incentive to take risk or borrow relative to a zero policy rate."
He added: "[The Fed] would rather do a lot of other stuff to ease. Negative rates may pop up here or there in terms of bills trading special or something like that, but as far as policy rate, I think it's vanishingly unlikely without a substantial change in rhetoric from the FOMC."
