Capital is being misallocated. Finally, unconventional monetary policy of recent years has encouraged significant bouts of capital misallocation, resulting in crowded trades, correlated risks and the overly stretched valuations seen in markets today. These in turn, are increasing systemic risk, raising the potential for a violent capital unwinding.
To be sure, despite the Fed’s recent rate projection revisions, interest rates are still likely to remain historically low for the foreseeable future. That said, I welcome signs that the Fed may be anticipating a need to raise rates sooner than previously expected, opening the door to merely “easy” monetary policy from “excessively easy” policy.
Given the five unintended consequences I highlight above, I’ve grown skeptical of the usefulness of excessively low policy rate levels, which may now be harmful to the U.S. economy and labor market. The utility of the Fed’s zero interest rate policy is now exceeded by the costs, similar to what happened to quantitative easing before it.
The bottom line: As I’ve mentioned before, select fiscal initiatives (like training to help address the job opening-worker skill mismatch) would be significantly more beneficial to the economy and labor market than continuing overly-easy interest rate policy.
Source: BlackRock Research
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.