<p>The same reason that oversupply leads to falling prices in any other market. <a href="https://tradingeconomics.com/united-states/money-supply-m0" rel="noreferrer">There is a <em>huge</em> amount of money out there</a>, and a lack of good returns with adequate levels of safety, so money is cheap.</p>
<p>The reason this leads to negative rates is that money, like other goods, has a carrying cost. Keeping physical cash requires heavily secured real estate and is a pain to ship around.</p>
<p>When you reach the end of the accounting day with a spare billion that needs to be somewhere, the easiest thing to do is hand it to the Federal Reserve to look after, even if that means paying them a small amount for the privilege. This is called the <a href="https://www.discoursemagazine.com/economics/2021/03/19/a-challenge-for-the-fed-some-overnight-rates-are-falling-below-zero/" rel="noreferrer">&quot;overnight window&quot;.</a></p>

CC BY-SA 4.0
2021-10-05T03:40:57.567Z
As of October 2021 the Fed has not gone negative ever in its history for the nominal short term interest rate on reserves parked at the Fed. There has been no payment of interest to the Fed for parking reserves there. So the "payment" to the Fed , if you can call it a payment, is only the loss due to inflation because inflation at the moment is higher than the approximately 10 bp annual rate that can be earned.
H2ONaCl
CC BY-SA 4.0
2021-09-27T12:02:19.347Z
2021-09-27T12:02:19.347Z
pjc50
<p>If there is inflation, <a href="https://economics.stackexchange.com/questions/36878/how-can-we-get-negative-real-interest-rate#comment56683_36878">what is your alternative</a>? If you do not lend, your money loses even more of its value.</p>
<p><strong>A numerical example:</strong> <br>
If inflation is 5% and you can lend at 2% nominal interest rate, you can make the loan and lose 3% of your money's purchasing power OR you can not make the loan and lose 5% of your money's purchasing power.
<br>
Poor choices, but one is better than the other.</p>

CC BY-SA 4.0
2021-09-27T10:47:16.230Z
I understand that. What my question is really focused on are the causes of the real interest rate being negative (-3% in your case) instead of being say 1% or 2%.  What are the market forces pushing it down there & why do they occur?
ThomasJ
CC BY-SA 4.0
2021-09-27T11:06:40.687Z
@ThomasJ Your question specifically asks "*why would lenders be willing to provide a supply of loans for a negative real return*". This is the supply side of the question, which I explained. The demand side is less mysterious, getting loans at negative real rates does not seems to be a bad deal. So what exactly are you asking about? Why is there so much available financial capital? Why aren't there more/better investment opportunities? IMO these questions are case specific and not about the general mechanism.
Giskard
CC BY-SA 4.0
2021-09-27T11:10:30.480Z
@ThomasJ These are still interesting questions, but they do not seem to have anything to do with the equilibrium rate going under zero.
Giskard
CC BY-SA 4.0
2021-09-28T02:59:53.467Z
10 months ago in an answer to a similar question I wrote "a ton of steel bought today will still be a ton of steel in a month, but the \$750 that buys a ton of steel today won't buy a ton of steel next month". And, yup, it actually was \$750 in those long-forgotten days.
hobbs
CC BY-SA 4.0
2021-10-05T08:03:55.033Z
@hobbs and the steel has a higher carrying cost than money; if you need to store $750,000,000 of metal you have more of a problem. Or a market corner opportunity. https://www.cnbc.com/2014/06/03/how-aluminum-became-a-cash-cow-for-goldman.html
pjc50
CC BY-SA 4.0
2021-09-27T07:10:52.733Z
2021-09-27T07:10:52.733Z
Giskard
<p>I am familiar with the real interest rates equation which states that real interest rate = nominal interest rate - expected inflation rate.</p>
<p>What I am failing to fully grasp, however, is why would lenders be willing to provide a supply of loans for a negative real return?</p>
<p>Obviously it is the market that leads them there, but what is it that drives the market to that point?</p>

CC BY-SA 4.0
2021-09-27T17:06:48.863Z
For related questions on negative nominal interest rates see https://economics.stackexchange.com/questions/10637/why-should-i-get-a-bond-with-negative-interest-instead-of-having-a-bank-deposit and https://economics.stackexchange.com/questions/36801/why-do-people-buy-negative-interest-rate-bonds
Henry
<inflation><interest-rate><nonexpert><credit>
What are the causes of negative real interest rates?
ThomasJ
# What are the causes of negative real interest rates?

(Asked by: username_0 on 2021-09-27)

I am familiar with the real interest rates equation which states that real interest rate = nominal interest rate - expected inflation rate.

What I am failing to fully grasp, however, is why would lenders be willing to provide a supply of loans for a negative real return?

Obviously it is the market that leads them there, but what is it that drives the market to that point?

**Tags:** inflation, interest-rate, nonexpert, credit

> **Comments:**
> **username_1**: For related questions on negative nominal interest rates see https://economics.stackexchange.com/questions/10637/why-should-i-get-a-bond-with-negative-interest-instead-of-having-a-bank-deposit and https://economics.stackexchange.com/questions/36801/why-do-people-buy-negative-interest-rate-bonds  

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## 2 answers

### Answer by username_4 on 2021-09-27. Score: 10

If there is inflation, [what is your alternative](https://economics.stackexchange.com/questions/36878/how-can-we-get-negative-real-interest-rate#comment56683_36878)? If you do not lend, your money loses even more of its value.

**A numerical example:**   
If inflation is 5% and you can lend at 2% nominal interest rate, you can make the loan and lose 3% of your money's purchasing power OR you can not make the loan and lose 5% of your money's purchasing power.
  
Poor choices, but one is better than the other.

> **Comments:**
> **username_0**: I understand that. What my question is really focused on are the causes of the real interest rate being negative (-3% in your case) instead of being say 1% or 2%.  What are the market forces pushing it down there & why do they occur?  
> **username_4**: @username_0 Your question specifically asks "*why would lenders be willing to provide a supply of loans for a negative real return*". This is the supply side of the question, which I explained. The demand side is less mysterious, getting loans at negative real rates does not seems to be a bad deal. So what exactly are you asking about? Why is there so much available financial capital? Why aren't there more/better investment opportunities? IMO these questions are case specific and not about the general mechanism.  
> **username_4**: @username_0 These are still interesting questions, but they do not seem to have anything to do with the equilibrium rate going under zero.  
> **username_5**: 10 months ago in an answer to a similar question I wrote "a ton of steel bought today will still be a ton of steel in a month, but the \$750 that buys a ton of steel today won't buy a ton of steel next month". And, yup, it actually was \$750 in those long-forgotten days.  
> **username_2**: @username_5 and the steel has a higher carrying cost than money; if you need to store $750,000,000 of metal you have more of a problem. Or a market corner opportunity. https://www.cnbc.com/2014/06/03/how-aluminum-became-a-cash-cow-for-goldman.html  

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### Answer by username_2 on 2021-09-27. Score: 7

The same reason that oversupply leads to falling prices in any other market. [There is a *huge* amount of money out there](https://tradingeconomics.com/united-states/money-supply-m0), and a lack of good returns with adequate levels of safety, so money is cheap.

The reason this leads to negative rates is that money, like other goods, has a carrying cost. Keeping physical cash requires heavily secured real estate and is a pain to ship around.

When you reach the end of the accounting day with a spare billion that needs to be somewhere, the easiest thing to do is hand it to the Federal Reserve to look after, even if that means paying them a small amount for the privilege. This is called the ["overnight window".](https://www.discoursemagazine.com/economics/2021/03/19/a-challenge-for-the-fed-some-overnight-rates-are-falling-below-zero/)

> **Comments:**
> **username_3**: As of October 2021 the Fed has not gone negative ever in its history for the nominal short term interest rate on reserves parked at the Fed. There has been no payment of interest to the Fed for parking reserves there. So the "payment" to the Fed , if you can call it a payment, is only the loss due to inflation because inflation at the moment is higher than the approximately 10 bp annual rate that can be earned.  

---

