Lower for longer has been the mantra of Wall Street ever since the Great Recession. Well, according to JPMorgan Asset Management’s chief global strategist, perennially low interest rates are “poison.”
“It’s not possible to stimulate that much economic growth by taking the cost of capital lower,” David Kelly said, in a presentation of a paper he and his colleagues wrote. “Households have far more interest-bearing assets than interest-bearing liabilities … so when rates fall, you don’t have any benefit.”
In the paper, called “The Failure of Monetary Stimulus,” Kelly argued that low rates lower income for savers and fixed-income investors, saps confidence about economic prospects, and discourages borrowing as people anticipate even lower rates. Borrowing, he contended, is key to propelling economic growth.
“Any medicine, taken to extreme, turns into a poison,” Kelly declared. “There is this assumption out there that monetary stimulus is becoming less effective over time. But it’s quite possible that it is not just less effective, it is actually counterproductive.”
Partly as a result, Kelly said, the US economy will grow about 1.9% annually over the next decade or so, in keeping with its sluggish growth since the financial crisis—a disaster that compelled the Federal Reserve and other central banks to slash rates as a stimulus measure.
The low rates helped the industrial and housing sectors, he said, but at the expense of the larger group of savers. “The expectation of low rates forever more is telling people there’s no need to borrow money now,” he said, in an account by Business Insider. “The whole way you stimulate an economy is to tell people ‘don’t wait and see, do it now.”
Come the next recession, he said, central banks will have an unpleasant surprise. They “will probably provide more monetary easing,” he predicted, “which actually won’t cure the patient at all, and therefore leads to even more” rate reductions.