On Wednesday, the Federal Reserve said it would raise short-term interest rates.
Quotes:
“There was a ho-hum reaction in the markets because there was no surprise. What is important is when the next hike will occur,” said Campbell Harvey, a professor of finance at Duke University’s Fuqua School of Business. “A recent survey that we did with CFOs suggests that unemployment could easily fall into the low 4 percent range by the end of 2016, which suggests hikes sooner rather than later.”
“Savers that relied on bank deposit interest rates, CDs and government bond coupons have paid a heavy cost as a result of the Fed’s policy. Raising the rate by 25bp will help them, but it is a drop in the bucket. The real interest rates are still negative. Note that the real interest rate being negative means that the rate of return you get on your savings doesn’t cover what you lost due to inflation.”
“The Fed has massively distorted financial markets by imposing negative real interest rates on the economy for such a prolonged period of time. It is historically unprecedented to have effectively zero interest rates during a prolonged period of consistent economic growth and only 5 percent unemployment.”
“The unintended consequences of Fed policy was the creation of a bubble in the high yield (junk bond) market and, to some degree, in many emerging markets. U.S. investors sought higher yielding alternatives -- not realizing they were increasing their risk. That bubble has been burst and we have just begun to see the collateral damage.”
Bio:
Campbell R. Harvey is a business professor specializing in financial markets, global risk management and portfolio management.
For additional comment, contact Harvey at: cam.harvey@duke.edu
https://www.fuqua.duke.edu/faculty_research/faculty_directory/harvey/