Negative Interest Rates – The Fed Doesn’t Think So
Federal Reserve (Fed) Chairman Jerome Powell remarked during a 60 Minutes interview on Sunday, “There’re plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve.”
The markets (Federal Fund Futures) started to finally believe the Fed today as the futures had been predicting negative rates from May 7th until Powell’s comments on Sunday (see the Bloomberg chart).
Based on his remarks and current market pricing, there appears to be very little upside potential for Treasury bonds.
In his memo “Mysterious”, Howard Marks of Oaktree, went through several examples of why negative rates would introduce distortions into the financial system and summed it up with perhaps the most reliable solution in a low to possibly negative interest rate world “…lies in buying things with durable cash flows”. Value investors look at the present day of the future free cash flows of a business and the durability of those cash flows. Could we be at an inflection point where value stocks outperform growth stocks going forward as market participants start to focus on those companies with durable cash flows?
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