Asset Management: race to keep interest rate low damaging for Economy

Bill Gross, a known name in the world of investing thanks to Pimco, one of the largest bond managers in the world, has claimed that there’s a war of currency being waged, that slashing interest rates would hinder, not help, economic growth the world over. He fears the reaction from the public to such drops in interest will be met with increased saving and a lack of spending.

This concern of Gross’ comes from a concerted effort by central banks to cut interest rates in hopes of invigorating the global economy. In this effort, the US’ Federal Reserve drop rates to historic lows during the ’08 financial crisis, and bonds have remained at such low rates since. And Germany has recently sold government paper at a negative rate as the eurozone prepares to boost bond purchases by €60 billion per month.

To this, Gross points out the larger institutions of the private sector which are put at risk by these efforts. Two such industries would be pension funds and insurance providers.

Gross sees the effort is misguided and would actually hurt any attempt at growth. In a monthly letter he regularly pens, he wrote: “Bondholders that have cheered every instance of lower and now sub-zero yields in developed countries, because of near-term capital gains that accompany them, must now be aware of the potential negative consequences.”

Gross isn’t alone in his expectation of failure. Chairman of Templeton Emerging Markets, Mark Mobius agrees that these dangerously low interest rates work against the interests of regular consumers and pensioners. He said. “Many savers who have suffered with low interest rates could be hit with another problem down the road resulting from all this easing — high inflation and asset bubbles.”

According to the Financial Times last week, Gross explained that he expected interest rates to rise at least twice this year, and that the Federal Reserve would initiate the first of which sometime this summer. He believes the decision would be made in the month of March.
“In the March meeting,” said Gross. “the Fed will either keep their patient language or they’ll drop it, and that will be the signal as to whether or not the rise will come in June or whether it’s later.”

Advice Gross handed out in his monthly letter was for investors to maintain a conservative perspective in respect to their portfolios, that a strong strategy for weathering the coming storm of financial insecurity caused by these low rates would come from the ownership of high-quality bonds and stocks.

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