Billionaire investor Warren Buffett said on Saturday that the near-zero interest rate has completely changed the economic landscape, warning that the consequences of easy monetary policies remain an unanswered question.
When the COVID-19 pandemic gripped the United States last year, the US Federal Reserve lowered interest rates to almost zero and began aggressively absorbing assets to prevent a new financial crisis.
Among Federal Reserve purchases: government debt. These actions allowed the Trump and Biden administrations to issue debt at lower rates to fund the massive aid packages that sent trillions to households and businesses.
“It’s raising stocks, it’s making business flourish, it̵
The Fed has said it will stick to its easy policy until the recovery shows signs of significant further progress.
Buffett said the near-zero effect of short-term interest rates has created an “incredible shift in the valuation of everything” because of the reduced incentive to hold relatively risk-free government debt.
He illustrated the example of holding 100 billion. Dollars in short-term government bonds (Buffett noted that Berkshire Hathaway holds more than that), which would now provide about $ 20 million. $ For a return of two basis points. Before the pandemic, Buffett said those holdings would have raked in about $ 1.5 billion a year.
“It’s been a sea change,” Buffett said. “It was designed to be that – that’s why the Fed moved the way they did, they wanted to give a massive push.”
This push has contributed to a surge in higher-yielding assets, from tech stocks to Special Purpose Acquisition Companies (SPACs).
Fed Chairman Jerome Powell said Wednesday that the broad start-up in market prices may be linked to the central bank’s easy monetary policies, but said optimism about coming to a post-pandemic world is the main driver.
Winners and losers?
For stocks, Buffett said low rates make stocks look like “good deals.” The reason: higher interest rates would be compared more from a company’s cash flows.
“Interest rates are on the value of assets, what gravity means,” Buffett said, later joking that “if I could reduce gravity pulls by about 80%, I would be jumping in the Olympics in Tokyo.”
Cheap borrowing costs also help households and businesses most affected by the pandemic, the same targets for tax relief measures.
Buffett’s longtime business partner, Charlie Munger, added during the meeting that lower rates could also narrow inequality between younger and older generations.
“[They’re] will have a hell of a time getting prices compared to our generation, so the differences between the rich and the poor in the rising generation will be much smaller, ”said Munger.
The losers from low interest rates, according to Buffett, were banks that had to lower their interest rates on loans. In the depths of the pandemic, Berkshire sold shares in banks such as JPMorgan Chase (JPM) and Goldman Sachs (GS).
Buffett said Saturday he still likes banks “in general,” but wanted to reduce Berkshire’s exposure to the “possible risk” that he admits was not fully realized.
“We’ll see where it all leads, but Charlie and I consider it the most interesting film we’ve ever seen in terms of economics,” Buffett said.
Brian Cheung is a reporter covering the Fed, finance and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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