Pimco Economist 'Low Interest Rates Here to Stay'

Joachim Fels, the chief economist of U.S. investment firm PIMCO, tells Handelsblatt that Britain could ride out Brexit but that the world had better get used to extremely low interest rates.
Joachim Fels believes that increasing automation in industry is hitting overall productivity.

Joachim Fels is the U.S.-based chief economist of PIMCO, a global investment-management firm and a subsidiary of German insurer Allianz. Mr. Fels, a native German, previously worked at Morgan Stanley in London for 19 years, lastly as chief economist. He moved to PIMCO about a year ago.

PIMCO specializes in investment-grade corporate bonds and manages assets of $1.5 trillion (€1.65 trillion). Star investor Bill Gross, who founded the company, was forced out during a dispute almost two years ago. Since then the firm has had difficulties and has become a thorn in the side of its parent company, the German insurance giant Allianz. Emmanuel Roman, PIMCO’s new head, is supposed to set things back on track.

In an interview, Mr. Fels said his main concern is the issue of permanent low interest rates. PIMCO is credited by some as coming up with the phrase “New Normal,” meaning little growth and lean interest rates.

Mr. Fels is also skeptical that Britain will get what it wants as it begins the tricky road to exiting the European Union. Among other things, he warns that London's place as a financial center will "most likely be all over without free access to the European Union."

Handelsblatt: Mr. Fels, will the British manage to retain free access to the markets of the European Union after deciding to leave the bloc? Britain’s new foreign minister, Boris Johnson, seems to believe so.

Joachim Fels: I don’t think so. For the European Union, the access to goods, services and capital markets and an open labor market are inseparable. The issue of being able to control immigration to Britain played a role in the Brexit vote.

There is often talk of the Norwegian model: an association with the European Union without really being a part of it. Could that be the example to follow?

I hardly think so. The Norwegians allow free access to their labor markets. Liechtenstein is the only country that doesn’t have to allow immigration and still has access to the other markets. But you can't make that comparison.

How long will the negotiations on Britain's exit last?

When the British officially request to leave, they then have two years to negotiate new trading agreements with the European Union. But they will probably need up to six years. All national parliaments, after all, must give their approval. It’s quite possible the British and the bloc will agree to the Norwegian solution as a transitional measure.

And then?

Then the British will still attempt to regain sovereignty over their labor market and accept low tariffs and other limitations as a trade-off. It could turn out to be an agreement similar to the one being worked out now between the European Union and Canada.

Do tariffs play a big role from the British point of view? The country certainly doesn’t have a strong export industry.

Don’t underestimate it. The Japanese build cars there; BMW produces the Minis for the whole of the European market in Britain.

What will be the impact on London as a financial center?

It will retain great importance. But in the future, it’ll most likely be all over without free access to the European Union. The banks will have to establish their own branch offices within the bloc to continue to be active there.

Given the turmoil in Europe, America is an island of tranquility.

Yes, we are in the eighth year of the upswing. The chances are good that it will become the longest such phase since the Second World War.

But the U.S. Federal Reserve seems to be stuck over whether to raise interest rates to a normal level again. What do you see happening?

I believe there will be, at most, one further interest rate hike, and if so, in December. The markets give a 50-percent probability of a rise in the current year, which, in my view, is about right.

The Brexit vote has made the Fed more cautious. But are there other reasons for it hesitating to raise interest rates for so long?   

As I see it, the Fed has lost confidence in its own forecasts after it was too optimistic in the last quarters. So it is more or less playing it by ear. At the moment, we seem to have an equilibrium with around 2-percent growth, unemployment that’s slowly declining and hardly any inflationary pressure. That’s why the U.S Fed is in no hurry.

Joachim Fells took up his position at Pimco about a year ago.


Critics say the Fed’s economic model is derailed.

All economic models are based on conditions from the past. When a new phase with low growth begins, they are overtaxed.

To what extent do international developments play a role in decisions by the U.S. central bank?

The Fed had seen how its slowly tightening monetary policy had strengthened the dollar since 2014. That resulted in problems in many emerging countries where companies had gone into debt in dollars, such as in Brazil and Mexico, but also in Asia. It induced the Chinese to loosen the fixed link to the dollar and allow their own currency to become somewhat weaker. All of that had an impact on the U.S. economy.

It seems monetary policy worldwide is stuck on almost zero interest rates. What caused that?

Since the financial crisis, almost all central banks that raised interest rates lowered them shortly afterwards. The cause is this surplus of money saved compared to the demand for financial resources for investment. That keeps the market rates low. And the central banks can’t go higher than the market.

What has to happen so it will be able to change again?

The baby-boomer generation saves a lot and, particularly in the United States, also retire later. The extreme example, if you will, is Warren Buffett, who earns billions and spends it on almost nothing except an occasional Cherry Coke and burger. It could take another 15 to 20 years in the United States until this generation has been retired long enough to start spending their savings. So we have a long phase of very low interest rates ahead of us.

A much-discussed subject in America is productivity, which is barely growing. The experts are puzzled about the causes. Where is the problem?

One cause of it, as paradoxical as it may sound, is technical progress. Many jobs have been automated or shifted elsewhere or have become superfluous through companies like Airbnb and Uber that are changing the shape of entire industries. As a result, well-paying jobs are disappearing, and people are instead accepting less productive work in the service sector. The classic example is the factory worker who lands at McDonald’s. Productivity declines in the overall statistics because of this effect.

Does this development also play into the hands of populist politicians like the proponents of a Brexit?

Yes. I believe that politics will be much more in charge of economic growth in the next couple of years.

What impact will that have on your profession?

We economists will have to be more concerned about politics and the changes in the overall conditions for the economy. Looking at the figures alone is no longer enough.


Frank Wiebe is a New York correspondent for Handelsblatt covering finance policy. To contact the author: [email protected]