Fink Warns Negative Rates Could Lead to ‘Dangerous’ Consequences


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The original version of this article ran April 14, 2016. It looks as if, if the chickens are actually going to come home to roost, 2018 might be the year we see what the chickens look like.

BlackRock Inc.’s Laurence D. Fink called negative interest rates “particularly worrying” and potentially counterproductive, as social and political risks contribute to what he described as the most fragile global economy in about a decade.


Nations around the world are leaning too much on extraordinary monetary policies while failing to make key decisions and invest in infrastructure to support long-term growth, Fink, head of the world’s biggest asset manager, wrote in an annual letter to shareholders Sunday. The policies are eroding investors’ returns and putting pressure on consumers to cut spending as they prepare for retirement, which may ultimately damage the growth that central banks are trying to spur, he said.

“These actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk, with potentially dangerous financial and economic consequences,” Fink said. That and other forces, including geopolitical instability, are creating “a level of fragility in the global economy that we have not seen since the lead-up to the financial crisis.”


Still, Fink stopped short of predicting a calamity. The probability of a continued economic recovery remains high amid signs of sustained, though modest, growth in the U.S. and Europe, he said. It’s just that if that falters, there is a risk of “profound and far-reaching consequences.”

Ultra-loose policies by the European Central Bank and the Bank of Japan, which adopted negative rates in January, have drawn warnings from big asset managers that such moves could backfire. In February, Scott Mather, co-manager of the Pimco Total Return Fund, said negative rates are making things worse by spurring volatility and pushing people to essentially put money into their mattresses.


The International Monetary Fund provided support for negative rates in a paper posted Sunday, citing current risks to growth and inflation. While there are limits to how far and for how long such policies can last, “we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability,” the IMF said.

While Fink, 63, spotlighted rates in his letter, his description of economic fragility drew on a long list of forces including energy-price swings, slowing growth in China, disruption of industries by technology and political uncertainties. He pointed to polarizing elections in the U.S. and Germany; scandals in Brazil; and Britain’s referendum in June on whether to leave the European Union. The U.S., in particular, is at a crossroads on how to deal with trade, immigration, climate change and longer life expectancy, he said.


“To be fair,” Fink wrote of negative rates, “these actions are the result of central banks being asked to solve economic problems without the help of coherent (and in the case of Europe, crossborder) fiscal policies.”

 

Copyright 2017 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Years of easy monetary policy have narrowed yields, depressing returns, causing consumers to save more to get that annuity stream.

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