In fact, they could actually have the opposite effect. To see growing empirical evidence of this, you only need to look at the two decades of Japanese experimentation with low rates or the most recent examples throughout the rest of the developed world for most of the past decade, according to Mather, who is chief investment officer US core strategies and a managing director in Pimco’s Newport Beach office.
It is now eight years since the financial crisis, but monetary policy intervention in the developed world is now even more extreme than immediately after the crisis and seems to be having less and less impact, noted Mather.
And in light of the uncertainties of how effective quantitative easing, zero interest-rate policy and negative interest rate policy really is, “central banks continue to do more of what has clearly not worked based on models that have not been tested in the current setting”, he added.
Mather pointed to the fact that central bankers and researchers, including James Bullard (president and chief executive, Federal Reserve Bank of St. Louis) and John Cochrane (University of Chicago Booth School of Business), have now begun to question the modelling foundation for low and negative rates.
In a paper titled Do Higher Interest Rates Raise or Lower Inflation?, Cochrane argues: “Perhaps both theory and data are trying to tell us that, when conditions including adequate fiscal-monetary coordination operate, pegs can be stable and inflation responds positively to nominal interest rate increases.”
What is instead happening at the moment is a backlash against a policy that has persisted for too long, in Mather’s view.
“The ‘neo-Fisherian’ school argues that pegging interest rates too low for too long can cause inflation to fall, ushering in a deflationary dynamic that can damage growth,” he said.
So what was once an appropriate and stimulative policy could become a counterproductive programme that creates new and undesired equilibriums, said Mather, and added: “Policymakers should take the time to question the efficacy of ever lower-for-longer interest rates rather than risk the possibility that groupthink monetary policy leads to a zombification of the economy.”
