Late last month,
the Federal Reserve (Fed) revised its interest rate forecasts
due to expectations of faster economic growth, raising its
projections for the federal funds rate in 2015 and 2016.
The Fed may be anticipating a need to normalize rates sooner
than many market watchers expect is good news. Why? In my
opinion, excessively low rates may actually be inhibiting U.S.
economic growth and job creation in these five unintended
Older workers are delaying retirement and staying in the
Excessively low rates are making it expensive for individuals to
retire, as potential retirees view investment income generation
from fixed income products as too meager to support a reasonable
standard of living. As
older people are staying in the workforce longer
, they're crowding out younger workers and stunting the job
prospects of the young.
Companies can't gauge the true level of U.S. economic
growth so they're holding off on committing capital.
Persistently easy policy has masked organic economic conditions,
making it difficult for company leaders to gauge the true level
of U.S. economic growth, i.e. growth in the absence of
extraordinary monetary policy. As a result,
corporations are waiting for greater certainty
regarding underlying economic conditions before committing
capital, and they're delaying or reducing investment and hiring,
and growing their cash balances.
Companies are taking advantage of extremely easy
corporate financing conditions at the expense of reinvesting in
organic business growth.
Given current low-rate conditions and very cheap financing costs,
many companies have been using debt issuance to aggressively buy
back their stock or pay dividends. But while this debt/equity
arbitrage may improve earnings-per-share growth, equity prices,
and perhaps even flatter the performance of some corporate
management teams, it may well be stunting growth-oriented capital
Inflation emanating from building wage pressure may be
more difficult to contain than the Fed anticipates
. In recent years, the labor market has split into two segments
thanks to a mismatch between the skills required for jobs and the
skills that workers have - those with appropriate skills are
getting jobs and those without such skills are making up the
long-term unemployed. Given this job opening-worker skill
mismatch, since the Fed began its monetary easing efforts, job
openings have increased, and the cyclical component of U.S.
unemployment has improved. As a result, though significant wage
gains for workers have been lacking and long-term unemployment
remains a problem, wages are trending higher for those workers
with the appropriate, desired skills.
This wage inflation could potentially continue for several
years and raises the possibility of higher levels of inflation in
the medium term. It's also worth noting that the U.S. capacity
utilization rate is currently hovering around a post-recession
high of 79%. The last time
was at today's levels the
Consumer Price Index (
sat at 3.5%, not today's near-zero levels, another sign that
higher levels of inflation could be on the way:
Capital is being misallocated.
Finally, unconventional monetary policy of recent years has
encouraged significant bouts of capital misallocation, resulting
in crowded trades, correlated risks and the overly stretched
valuations seen in markets today. These in turn, are increasing
systemic risk, raising the potential for a violent capital
To be sure, despite the Fed's recent rate projection
revisions, interest rates are still likely to remain historically
low for the foreseeable future. That said, I welcome signs that
the Fed may be anticipating a need to raise rates sooner than
previously expected, opening the door to merely "easy" monetary
policy from "excessively easy" policy.
Given the five unintended consequences I highlight above, I've
grown skeptical of the usefulness of excessively low policy rate
levels, which may now be harmful to the U.S. economy and labor
market. The utility of the Fed's zero interest rate policy is now
exceeded by the costs, similar to what happened to
The bottom line: As I've mentioned before, select fiscal
like training to help address the job opening-worker skill
) would be significantly more beneficial to the economy and labor
market than continuing overly-easy interest rate policy.
Source: BlackRock Research
Rick Rieder, Managing Director, is BlackRock's Chief
Investment Officer of Fundamental Fixed Income, is Co-head of
Americas Fixed Income, and is a regular contributor
. You can find more of his posts