Central bank policies of low and even negative interest rates are failing to stimulate growth and boost inflation as intended, Pimco’s deputy chief investment officer has warned.
Scott Mather, who co-manages the $87.8 billion Pimco Total Return fund, cautioned that so far the ‘extraordinary’ monetary policy pursued by central banks in the wake of the financial crisis had not yet delivered the expected results.
In a note to investors, Mather (pictured) questioned whether these policies were in fact having the opposite effect, highlighting that eight years after the crisis an extended period of low interest rates had not resulted in rebounded growth or inflation.
‘Perhaps the models that prescribe low, even negative, interest rates are simply wrong,’ he said.
‘Yet…central banks continue to do more of what has clearly not worked based on models that have not been tested in the current setting. The almost religious fervor with which these polices are embraced seems to scale with their growing ineffectiveness rather than objective measures of success.’
Mather highlighted research by economist John Cochrane, a distinguished senior fellow at the University of Chicago Booth School of Business, which argues that extended periods of low interest rates can cause inflation to fall, ushering in a deflationary environment which can damage growth.
Dawn of dead end
‘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,’ Mather said.
It is not the first time Mather has called on central banks to change tact. In February he told Bloomberg growth was more likely to rebound if the Fed ruled out negative interest rates and if the European Central Bank spelled out the limits to which is would pursue this strategy.
Mather’s comments echo similar sentiments expressed by his former boss Bill Gross, who left Pimco and the Total Return fund, in September 2014.
In February, Gross, who now runs the $1.3 billion Janus Unconstrained Bond fund, branded central bank policy as ‘increasingly addled’.
In a note to investors Gross said: ‘Central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity - until it reached a negative interest rate dead end and could drive no more.'