Whilemany banks are hoping interest rates will move higher, rates are likely to remainlow for the remainder of the decade, according to PIMCO.
Thatwas the message that Tony Crescenzi, executive vice president, market strategistand portfolio manager at PIMCO, delivered March 30 at the fifth annual SNL Financial Community BankersConference in Dallas. Crescenzi's comments were not exactly music to the earsof bankers in attendance since most small institutions have seen their net interestmargins come under pressureas rates have remained persistently low. The strategist said the Fed could possiblyraise short-term rates a few times in 2016 and gradually increase rates in the yearsthat follow, eventually moving the target fed funds rate to just 2.0% by the endof the decade.
Crescenzioffered a number of reasons why he sees rates remaining low in the years to comeand pointed to comments that Federal Reserve Chair Janet Yellen made a day earlierin a speech that many in the market perceivedas dove-ish. Crescenzi said Yellen used a few comments that were "very interesting,"including phrases like "especially cautious" and "greater gradualism"in terms of the pace of future rate hikes. He said one could argue that Yellen effectivelyeased monetary policy with her comments and said the Fed's public communicationcan be extremely important. For instance, he noted that former Fed Chairman BenBernanke, who serves as a senior adviser to PIMCO, has told the firm that monetarypolicy is 98% communication and just 2% action.
The strategistsaid the Fed is currently in tightening mode, but he does not expect the centralbank to move short-term rates that much higher. He said the Fed is now looking toraise rates just twice in 2016, down from a prior expectation of four rate hikesthis year, and that markets continue to believe that the "Yellen put"exists – as was the case with former Fed chairs Alan Greenspan and Bernanke. Aftermarkets cratered early in 2016, Crescenzi said the Fed decided not to move rateshigher in March and reiterated the plan to proceed with caution again during Yellen'sMarch 29 speech.
He saidYellen focuses on the alternative U6 labor underutilization rate as opposed to thetraditional U3 unemployment rate. The latter is the reported unemployment rate,while the U6 rate includes workers who are part-time purely for economic reasons.The U6 rate stood at 9.7% in February, down from 9.9% in January. Crescenzisaid a 9% rate would effectively represent full employment and noted that only 1.5million more people would need to join the workforce full time to reach that level.He added that Yellen would also like to see wages increase before she feels theeconomy has reached full employment.
Crescenzibelieves policy rates will remain low for the rest of the decade. He said centralbanks cannot generate growth, aggregate global demand remains weak and debt deleveragingcontinues in many countries. Savings rates among U.S. households and across theglobe are also higher, and many populations are aging, limiting the outlook forgrowth, he said.
Rightnow, the Fed is hoping to stoke growth and let the economy "run hot,"to boost wages and inflation, Crescenzi said. He noted, though, that if growth doesnot increase, the Fed is exhausting its policy options.
The outlookfor rates to remain lower for longer was not what most community banks would liketo hear after watching their margins compress significantly since the credit crisis.That compression is due in no small part to the low rate environment. ChristopherMurray, principal at Sandler O'Neill & Partners, noted earlier at the conferencethat community banks are primarily in the spread business, making money by takingin deposits and lending them out at a higher rate. In a lower growth, low rate environment,what community banks are getting paid is shrinking and institutions simply do nothave much ability to drive earnings higher, he said.