How it will all play out remains to be seen. The New York Post recently reported that several of the Big Apple’s diaspora were already suffering survivor’s guilt—and they’d only been gone for two months.
Implications Of Zero Interest Rates
Record low interest rates, combined with a desired change in lifestyle, make moving or purchasing a second home a seemingly attractive proposition. But ask a bond market professional about this choice and many would tell clients there is no need to rush.
Colin Robertson, executive vice president and head of fixed income at Northern Trust Asset Management, believes the Federal Reserve could keep short-term interest rates near zero for five years, possibly even 10 years.
Ten years is a long time about which to make predictions. But Robertson’s view is shared by Lacy Hunt, former Fed governor and current executive vice president at Hoisington Investment Management, and many others.
That’s because economic growth and inflation both were muted even before the pandemic surfaced. An aging population and weak economic growth have been conspiring to keep interest rates very low for the last decade even as central banks around the world tried to rekindle inflation. All of this causes pain for retirees, banks, pensions and insurance companies.
However, central banks seem far more concerned about deflation and, after the pandemic, depression-level unemployment numbers. “The Fed learned its lessons from the financial crisis when they tried to thread the needle,” Robertson says. “This time they took a bazooka to the gunfight.”
More ominously, the Fed is discussing yield curve control, or using their own reserves to manipulate the market and bring down yields at the long end of the curve. “Right or wrong, investors are counting on the Fed to come into the market if there is a second wave in the fall,” Robertson argues.
JP Morgan’s Kelly questions how far the Fed can effectively go. “There is a limit to their ability to hold down the long end of the curve,” he says.
President Trump, no fan of Fed chairman Jay Powell, has called for negative interest rates. Most bond market professionals don’t like the idea, believing it would create all sorts of distortions.
The experience of both the Bank of Japan and the European Central Bank with zero interest rates isn’t encouraging. Sheets compares both to the Hotel California. “Central banks can check in but they can’t check out,” he says.
Future Fed policy hinges in large part upon the upcoming presidential election.
Kelly thinks that if President Trump is re-elected he will fire Jay Powell in favor of a true soft money advocate. That’s in spite of the Fed’s move to increase its balance sheet to $11 trillion by year-end.