Firms, Funds Feel Squeeze of Low Rates By Liz Rappaport, Michael Corkery and Leslie Scism, Wall Street Journal
More evidence that the Fed’s ultra-loose monetary policy is distorting the economy.
Historically low interest rates are starting to take a toll throughout the financial industry, presenting a potential downside to the Federal Reserve’s aggressive efforts to reignite growth in the sluggish economy.
Rock-bottom rates are squeezing profit margins at banks that rely on the gap between what they charge borrowers and pay depositors. They also are hurting returns at pension funds already under mounting pressure to meet obligations to retirees, while making certain kinds of insurance more expensive as firms try to recoup earnings that are likely to shrink if the ultralow rates linger.
Still, “it is clear that there are costs,” says Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets. “The question is whether the good done by low interest rates is enough to justify forcing people and institutions to incur these costs.”
Institutional investors are now being forced into stocks
In response, some investors that historically have relied on debt investments are starting to consider buying riskier assets such as stocks, he says.
“Obviously, we need low rates to reinvigorate our economy, but low rates are a great subsidy for borrowers and a great tax on savers and pension plans,” Laurence Fink, chairman and chief executive at BlackRock Inc., said at the end of October, adding that his firm has also had conversations with pension and endowment clients about investing in equities and alternative investments.
And insurance companies are reducing the products they offer
Meanwhile, insurers are protecting themselves against lower returns by pushing up prices or cutting back on the products they offer. One example: People with policies that help pay for future nursing-home and assisted-living bills are getting hit with increases of 10% to 40%.
In November, MetLife Inc. said it would no longer sell long-term-care policies. John Hancock Financial, a unit of Manulife Financial Corp., had already suspended sales of these policies to employee benefits programs.
Jeremy Jones, CFA
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