The Federal Reserve won’t return interest rates to their post-financial crisis lows, according to veteran investor Howard Marks – and he thinks that’s a good thing.
“The U.S. economy is doing pretty well and so it’s not clear that it requires stimulus,” Marks told CNBC’s Frank Holland on Tuesday.
The current target federal funds rate of 5.25% to 5.5% is an “emergency measure designed to calm the economy and inflation,” Marks continued.
“One of these days we’ll declare victory against inflation and the Fed will bring rates down to a moderate, sustainable level. I think it’s a three-fold.”
The Fed cut rates to near zero in 2007 and 2008, before increasing them slightly between January 2016 and until the Covid-19 pandemic. Between 2009 and 2021, the federal funds rate averaged 0.5%, Marks said.
“My thesis is: We’re not going to go back to rates of zero, half or one. I think it’s an unnecessary stimulus and I don’t think permanent stimulus is a good thing “, did he declare.
“I think interest rates should mostly be set by the free market. That is, negotiations between borrowers and lenders, rather than having a central bank tell people what should be the rate. So I hope we’re back to that climate.
Howard Marks, Co-Chairman of Oaktree Capital, speaks at the Milken Institute Global Conference on October 19, 2021 in Beverly Hills, California.
Patrick T. Fallon | AFP | Getty Images
There are “significant harms” to keeping rates too low and creating a “permanent recovery posture,” he added.
Marks argued in a series of notes published in 2023 that low rates in the 13 years after 2008 distorted the behavior of economic and market participants, calling this period “easy times, fueled by ‘easy money “.
The impact of these ultra-low rates includes over-stimulating the economy and fueling inflation; making risky assets more attractive than they should be, with insufficient compensation for the increased risk; and causing too many fluctuations in the availability of capital, Marks said in January.
He told CNBC on Tuesday that the new environment should see credit play a “significant role in most people’s portfolios.” Investors “lost this habit, because the yields on credit instruments were very low. Today they are very healthy and can form a very solid base,” he said.
Marks’ own company, Oaktree Capital Management, specializes in investing in distressed securities.
“When you’re talking about rates being higher than they’ve been in the previous 14 years, that’s an advantage we have today. Investors in sub-investment grade credit instruments grade – high-yield bonds, senior loans, mezzanine financing, etc. – today “We can get interest rates that approach or exceed the historical average yield on stocks, which is around 10%,” said Marks.
“And I think the ability to get equity-like returns from investments that offer contractual returns in that neighborhood is a huge advantage that we haven’t had during this whole period of low rates. So, you know , we’re very excited about the future for the things we’re doing.
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