As a credit investor, Howard Marks (Trades, Portfolio) knows a thing or two about interest rates. During his time at Oaktree, he has frequently voiced his opinion on central bank policy, both through his memos and public appearances. On Aug. 8, he gave an interview to Bloomberg in which he criticized the Federal Reserveās rate-cutting policy.
What is the Fedās job?
Marks pointed out the contradiction between what the Federal Reserve is doing and where the economy is right now. If the economy is really doing as well as we are led to believe, then the central bank should not be cutting rates:
āIt is unusual. Usually what happens is: We stimulate the economy when itās doing poorly and we want to wake it up from the doldrums. We generally donāt stimulate the economy after 10 good years. We usually accept that there will be an ebb and flow to the cycle and that there might be a justified recession. We have the lowest unemployment rate in 50 years, and you usually donāt stimulate at that time.ā
What is the Federal Reserveās purpose? Is it to ensure that the good times never stop rolling? Marks doesnāt think so:
āSo the point is, the Fed can stimulate. Should it do so? Is it the Fedās job to do so? I donāt think it should. I donāt think itās the Fedās job to make sure thereās never a recession. What the Fed chair tends to say -- Jay Powell said last month -- and I have a quote from September 2007 -- they say, āWeāre going to do what it takes to keep the expansion going.' Is it the Fedās job to keep the expansion going forever? I donāt think so.ā
Marks said that if he were running the Fed (not that he wanted such a job), he would use monetary policy to cool off the economy during times when it was overheating, and stimulate it when it was flagging. In the intermediate periods he would do nothing.
What does it mean if the Fed keeps cutting rates?
Wealth inequality is on the rise around the developed world. While it has become increasingly popular for politicians on both the left and the right to blame this on corporate greed, the reality is that investors and companies are simply responding to the broken incentives put into place by governments and central banks. This is at the center of Marksā critique of Fed policy:
āIt means that savers and lenders and people with money are going to have trouble getting good returns. All the returns emanate from the base rate, which is what the Fed sets, and the lower it is, the lower the prospective return on everything is. The process of lowering the rates causes assets to inflate, so there will be more wealth piled up by the people who have assets and itāll be harder for people who have just a little bit of savings to have a return.ā
Like it or not, the ultra-low interest rate environment is seemingly here to stay.
Disclosure: The author owns no stocks mentioned.
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