In late June, Rick Rieder, Managing Director at BlackRock wrote an article called, “5 Reasons Why Excessively Low Rates May be Harmful to the Economy.” His five reasons are the following:
- Older workers are delaying retirement and staying in the workforce.
- Companies can’t gauge the true level of U.S. economic growth, so they’re holding off on committing capital.
- Companies are taking advantage of extremely easy corporate financing conditions at the expense of reinvesting in organic business growth.
- Inflation emanating from building wage pressure may be more difficult to contain than the Fed anticipates.
- Capital is being misallocated.
Let’s review these 5 ways fed policy may be hurting the economy one at a time.
Regarding older workers delaying retirement and staying in the workforce, it is true that low rates are effectively stealing from our senior citizens the income they had once expected to earn from their investments. And it makes perfect sense that this would cause some to delay retirement, staying in the workforce longer and crowding out younger workers. Concerning reason number one, Rieder has made a solid point.
When it comes to reason number two, however, I think Rieder has things backwards. While it is true that the Fed’s easy-money policy has masked organic economic conditions, the masking comes from artificially high-priced financial assets creating a culture of complacency and false hope. In fact, I think it is not corporate leaders but everyday people, politicians, and economists who fail to see the true underlying structural weakness in the U.S. economy. I would venture to guess that corporate leaders are holding off committing capital precisely because they do understand the role that easy money is playing in propping up the economy, and because the structural weakness in the U.S. economy is providing an environment in which many corporations simply can’t find opportunities worth taking.
Concerning the third reason, once again, I think Rieder has it correct. Rather than investing capital for growth, as a whole, corporate America has been taking advantage of cheap financing, borrowing large sums of money, and using that money to buy back stock and pay dividends. Something simply feels off when I read a press release simultaneously announcing thousands of job cuts and a large buyback or dividend increase—and I’ve read far too many of them in recent years.
Is inflation hiding just around the corner? Perhaps. But I don’t think it will come from building wage pressures, considering how bifurcated the employment landscape is. Additionally, I suspect the Fed will have an easier time containing inflation than many assume. The U.S. economy has been dependent on historically low interest rates for nearly six years. The longer the low-rate scenario continues, the more difficult it will be to reverse. After six or more years of ZIRP, anyone who tells you that a series of rate hikes won’t squash inflation pressures, is, in my opinion, quite mistaken.
Finally, I have no qualms with Rieder’s statement, “Capital is being misallocated.” He’s right. And it’s part of the reason the Fed will have such a hard time ever fully reversing its ultra-easy monetary stance without causing serious harm to the economy.
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