Negative interest rates: Staying power for the long term?

Chungwei Hsia
Emerging and Developed Markets Analyst — Sovereign Debt

Instead of setting the rate, we are actually pumping — the Fed was pumping money into the system. So, you have a garden hose and you connect that to a fire hydrant. And now you’re trying to push the money through, in the sense that the central banks started to scratch their head[s] and said, “Well, maybe we should go below zero and see what happens.” But I do anticipate that the low rate or in or around the 0% [range] will be with us for a long time and here are the reasons:

Number one, low rates are supposed to be stimulating the economy. But, if you look at the flipside of it, taking away low rates means that we are anticipating a better growth, which we haven’t been seeing. Number two, some of the more aggressive balance sheets probably would not survive a higher rate. So, if I were the central bank governor, I would be very worried that, “When is the good, the right time to take away the low rate?”

I was once an engineer and if I look at this economic activity, as in the form of waves — the business cycle — you know, the wave, now, has become really, really tiny. The amplitude is small, but the frequency is higher because we are trying to escape from this slow growth mode, but there is really not a good reason why we do have that organic strength, which brings [us] back to what we were talking about just now that central bankers are concerned about raising the rates — they don’t want to be responsible for taking the economy down into a recession. But as we all know, every economy is just one shock away from a recession. Thus, in order for the rate to go up, the central banks will have to be very cautious.

The views expressed represent the Manager's assessment of the market environment as of June 2016 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

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