US Fed policy rate will not go to zero, will be around 3% over next 5-10 years: Howard Marks

Today, policy rates in the US stand at 5.5 percent and the Fed expects three cuts in 2024.

Howard Marks, the legendary stressed asset investor, who is usually obstinate about not forecasting how markets will move going ahead, said with a degree of certainty that US Fed interest rates may not go as low as it was before Covid-19 pandemic upended the world.

“I’ll still stick with my guess that rates will be around 2-4 percent, not 0-2 percent, over the next few years,” Marks said  “Do you want more specificity?  My guess – and that’s all it is – is that the fed funds rate will average between 3 percent and 3.5 percent over the next 5-10 years.”

Even Marks, who co-founded Oaktree Capital Management, acknowledged that this forecasting was a bit uncharacteristic of him.

“Before readers protest my uncharacteristic descent into forecasting, I’ll point out that, at Oaktree, we say it’s okay to have opinions on the macro; it’s just not okay to bet clients’ money on them,” he wrote in a memo published on January 9. “We invest with an awareness of current macro conditions, but our investment decisions are always based on bottom-up analysis of companies and securities, not macro forecasts.”

In the last 2-3 years, the US Federal Reserve has been forced to raise interest rates as inflation induced a cost of living crisis – moving away from an ultra-low interest rate regime. Today, policy rates in the US stand at 5.5 percent and the Fed expects three cuts in 2024.

Also read: The short-term never bothered him: Howard Marks remembers Munger

Such high interest rates were last seen when the dot com bubble burst. After that, the Fed kept a supply of easy money. Inasmuch, even during the 2008 global financial crisis, the rates did not reach 3 percent.

US Fed fund rate in last 20 years.

The low interest rates has resulted in a massive bull run in the US market, especially during 2019-2020, which was the longest bull run in the market. However, things may not be the same now, Marks believes.

“We’re unlikely to go back to such easy money conditions, other than temporarily in response to recessions. Therefore, the investment environment in the coming years will feature higher interest rates than those we saw in 2009-21. Different strategies will outperform in the period ahead, and thus a different asset allocation is called for,” .the 77-year-old said

If Marks was Fed chair…

Marks believes we haven’t had a free market in money since the late 1990s, when he thinks the Fed became “activist,” eager to head off problems real and imagined by injecting liquidity. Marks believe such activism is unwarranted.

“If I ran the Fed (to be clear, I don’t expect to be offered the job), I think I would (a) lower rates to stimulate the economy when it’s growing too slowly to produce needed jobs; (b) raise rates to cool off the economy when it’s overheating, to head off rising inflation; and (c) keep my hands off rates the rest of time, allowing market forces to determine their level,” said Marks.

“Under this construct, we certainly wouldn’t see rates perpetually near zero, as we did much of the time from 2009 to 2021.” he said.

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