Entirely possible that we’ll see low interest rates forever
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On Tuesday, August 18, 2020, Washington, D.C., U.S.A, is home to the Marriner S. Eccles Federal Reserve.
Bloomberg via Getty Images| Bloomberg via Getty Images
One asset manager believes interest rates will remain at record lows for “ever” despite recent efforts to normalize policies by central banks around the globe.
Julian Howard of GAM Investments spoke on CNBC about “Squawk Box EuropeHe stated last week that it was “entirely consistent historically” to speak of low rates for ever.
Howard serves as the investment director for multi-asset solutions and is responsible for managing 103 billion Swiss Francs (or $112 billion) of assets.
His citations researchPaul Schmelzing (economist and visiting scholar, Bank of England) was the author. The paper was published by Schmelzing in 2020.
The research looked at interest rates globally dating back to the 14th centurySchmelzing predicted that real rates would soon be permanently negative, and he identified a downward trend.
Howard explained that recent low rates are a return of a long-term trend where yields have been falling for a longer time.
He also pointed out the economic damages caused by climate change and coronavirus pandemic, both of which are expected to have an “extremely, very adverse effect on interest rates.”
Howard stated that there is no environment in which the central bank can normalize interest rates, 1990s-style, when there will be no growth.
Howard predicted that the Federal Reserve wouldn’t raise interest rates until the second half 2022.
Low interest rates can pose risks
CNBC’s Tuesday interview with Jim Himes (D-Conn.) revealed that the low interest rates, as well as “free money,” that we have seen over many years could lead to asset bubbles.
This occurs when the investment’s value rises rapidly but does not reflect its true value.
Himes stated that the low interest rates have also led to “remarkably strange financial behavior,” including the growth of “near-cult special purpose acquisition businesses” or “dumping money into”. meme stocksCompanies that are “surprisingly popular” on social media have seen share prices rise and they have been a source of surprise.
Himes suggested it belonged to the Federal Reserve’s responsibility to manage low interest rate risk.
He said: “I fought my entire career to make sure monetary policy does not get influenced by the tender mercies of political people in the Congress but I think … we’re taking a turn there and hopefully that will begin over time to maybe take some of the risk out of what are pretty clearly some asset bubbles out there.”
Following the financial fallout, Fed officials have begun to normalize their policy the coronavirus pandemic. In November, it stated that bonds purchases will begin to taper later in the month and that prices had risen faster than expected by central bankers.
Also, the Fed voted against raising interest rates beyond their anchor at zero and cautioned against anticipating rate increases.
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