February 23, 2015

The Markets

It was all Greek to investors.

After debating for weeks Eurozone leaders found grounds for compromise and Greece became the beneficiary of a four-month extension to its current aid package. The deal was contingent on Greece coming up with a list of economic reforms by this Monday for European leaders to approve.

World markets were unconditionally thrilled with the news. In the United States, the Dow Jones Industrial Average and Standard & Poor’s 500 Index both closed at record highs. Markets across Europe and Asia finished the week higher. The only stock markets reported in Barron’s International Perspective that didn’t finish the week higher were in Taiwan and Canada.

Closer to home, The Federal Reserve’s Open Market Committee minutes indicated to some rate hikes may not begin in June, as had been expected. However, Reuters pointed out employment data has been very strong since the January 28 meeting and could affect the Fed’s decision about when to tighten.

Negative Interest

You learned about negative numbers in school. Now, you get to learn about negative interest rates. Currently, the European Central Bank (ECB) pays -0.2 percent on money banks have deposited!! By way of comparison, the U.S. Federal Reserve’s Fed funds rate is 0.12 percent.

According to The Economist, banks in the United States and Europe have very significant amounts of cash tucked away with their central banks, thanks to quantitative easing. By paying a negative rate of return, the central banks are encouraging member banks to reduce reserves by lending. The idea is to stimulate economic growth. The catch is borrowers may be in short supply when economic prospects for new businesses are murky.

One unexpected consequence of negative interest rates is some financial firms’ computer systems have had to be reprogrammed because they weren’t set up for negative rates.

Weekly Focus

“Do you want to know who you are? Don’t ask. Act! Action will delineate and define you.”
Thomas Jefferson, Third U.S. President

Image courtesy of Dennis Jarvis, used in accordance with the Creative Commons ShareAlike 2.0 Generic license.

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