Hedge fund manager Stanley Druckenmiller doesn’t think the Federal Reserve’s experiment of keeping interest rates near 0% to spur economic growth is going to end well.
Speaking at The New York Times’ DealBook Conference on Tuesday, Druckenmiller said, “All you do [when you keep interest rates at 0% for this long] is you’re pulling demand forward today. This is not some permanent boost you get, you’re borrowing from the future.”
Druckenmiller added, “I think there’s been such a mis-allocation of resources because [zero interest rate policy] has gone on so long and so unnecessarily. The chickens will come home to roost.”
The basic idea supporting rates at 0% is that the economy isn’t as strong as it needs to be (or should be), and only by keeping interest rates super low will the Fed be able to give the economy the space and time it needs to repair itself.
But in Druckenmiller’s view, this policy has simply created bad behaviour. And worse, it has mortgaged the economy’s future potential.
Druckenmiller told The New York Times’ Andrew Ross Sorkin, “I love the title of your conference [“Playing for the Long Term”], because whether it’s government, business, the Fed, or money managers, everybody is managing for the short-term now.”
And in Druckenmiller’s view, this is an outgrowth of the Fed’s policy.
Back in 2008-2009 at the height of the financial crisis, Druckenmiller said he thinks the Fed did a “terrific” job keeping the economy afloat.
But Druckenmiller added that somewhere between 10.1% and 5.1% unemployment, with economic growth looking up and consumer spending bouncing back, you would have thought the Fed would get away from its emergency policy setting. But it hasn’t.
And so in this Druckenmiller seems to be adopting the view that the Fed is sending signals about an economy that is simply not strong enough to handle anything but 0% rates despite many indications of an economy that is more than capable of handling normalized interest rates.
All in all, though, Druckenmiller simply thinks the Fed is making a mistake.
As an example, Druckenmiller recalled that in 2003, the economy was growing at somewhere between 7% and 9% and then Fed had rates at 1.5%.
Druckenmiller said that at the time he knew the Fed was making a mistake, he just didn’t know how it would play out (his guess would have been runaway inflation, and he admits this would have been dead wrong). A few years later, the housing bubble started to blow up and then it became clear to Druckenmiller what the Fed’s errors had created.
And now he feels the same way today: the Fed is making a mistake but Druckenmiller doesn’t know where or how it will go wrong. He just knows it will.
Watch Druckenmiller’s full interview here.
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