Tags: Buffett | rates | Europe | Fed

Buffett: Negative Interest Rates in Europe Will Keep Fed on Hold

By    |   Friday, 01 May 2015 12:22 PM

You can count legendary investor Warren Buffett among those who believe the Federal Reserve will remain cautious about raising rates.

That's partly due to our sluggish economy — GDP grew only 0.2 percent in the first quarter — and partly due to the negative interest rates prevailing in most of the eurozone, he tells CNBC.

"I think it would be very hard for the Fed to bump rates up here with negative rates in Europe," Buffett explains. The 2-year German government bond yields negative 0.23 percent.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. And most economists don't expect it to begin raising rates until at least September.

As for the economy, Buffett doesn't think it's performing too badly. Even with an annual growth rate of just 2.2 percent since the recession ended in 2009, the economy is "doing well," Buffett notes.

"We might like to see more growth, [but] 1 percent inflation means that in a generation things improved 20 percent per capita, and that's another $10,000 of GDP per capita in one generation. That's fabulous."

Consumer prices slipped 0.1 percent in the 12 months through March.

Elsewhere on the Fed front, The Wall Street Journal editorial page has been giving it to the central bank but good over the past few years for a massive easing program that has produced only a mild economic recovery.

But now former Fed Chairman Ben Bernanke is giving it back to The Journal. He takes issue with an editorial in the paper this week calling for tighter monetary policy.

"The editorialists point out that the Fed's projections of economic growth have been too high since the financial crisis, which is true," Bernanke, now an economist at the Brookings Institution, writes on his blog.

"Therefore (the WSJ concludes), monetary policy is not working and efforts to use it to support the recovery should be discontinued."

Then come the fighting words.

"It's generous of the WSJ writers to note, as they do, that 'economic forecasting isn't easy.' They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the Fed decided not to raise the federal funds rate above 5.25 percent," states Bernanke, who headed the Fed from 2006 to 2014.

The Journal editors ignore the other side of the coin, Bernanke says. "They fail to note that, while the Fed (and virtually all private-sector economists) have been too optimistic about growth, they have also been consistently too pessimistic about unemployment, which has fallen more quickly than anticipated."

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You can count legendary investor Warren Buffett among those who believe the Federal Reserve will remain cautious about raising rates.
Buffett, rates, Europe, Fed
Friday, 01 May 2015 12:22 PM
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