The Ripple Effect of Zero Interest Rates

April 27, 2020

This year’s contagion in financial markets has been the global spread of zero interest rates to the U.S.1 Until recently, the U.S. was one of the last large economies with meaningfully positive interest rates. However, it took us only a few months to move to near zero.

Even before this year, rates in the U.S. were fairly low2, and we’ve seen the ripple effects of these low rates across the economy.

First, borrowers have been able to obtain capital at very low rates – well below historical averages.2 While this is good to help spur growth, it has also encouraged some to borrow more than they should, and debt and leverage has steadily increased over the last several years.3

With greater access to capital at low rates, many companies that were marginally profitable or losing money continued to borrow and maintain supply of goods to a market that may not need it (oil prices this week reflect this).4 If the market had been functioning closer to normal and rates were higher, it very well may have prevented this oversupply.

Additionally, the Fed has intervened and provided liquidity to help stabilize some debt securities. The Fed has noted they can and will be actively purchasing money market securities and Treasurys, high-yield ETFs, small business loans and municipal bonds, in addition to providing lending facilities to small businesses and investors.5

These actions helped improve the functionality of the market and instill greater confidence in U.S. markets. However, in order to provide this support, the Fed had to create a large amount of U.S. dollars.6

Inflation – with the exception of a few areas such as education, medical care and some housing – has been tame to negative for many years now.7 But this potential increase in the money supply increases inflation risks, which you can see as Treasury Inflation-Protected Securities (+5.84%)8 and gold (+17.31%)9 have performed well since March 23, even as markets have recovered.10

There are many oddities (such as negative oil prices and near-zero interest rates) arising in this unprecedented market. Our assets need to be productive and we as a country must become productive again as well. We are closely monitoring interest rates, consumer behavior and inflation expectations to determine how our equity and fixed income portfolios should be positioned.

If you have any questions about your portfolio in the current market environment, contact your Exencial advisor.


1. CNN Business (3/16/20) – Federal Reserve cuts rates to zero to support the economy during the coronavirus pandemic
2. Macrotrends (4/23/20) – Federal funds rate – 62 year historical chart
3. CNN Business (4/3/2020) – Get ready for wartime levels of national debt and tough choices ahead
4. MarketWatch (4/23/20) – About 150-years of oil-price history in one chart illustrates crude’s spectacular plunge below $0 a barrel
5. Reuters (3/23/20) – Fed’s big move could help U.S. Treasury liquidity, but effects may not last long
6. CNBC.com (3/27/20) – Coronavirus stimulus just pushed Fed’s balance sheet past $5 trillion for the first time ever
7. The Balance (3/16/20) – US inflation rate by year from 1929 to 2022
8. Morningstar (data from 3/23/2020 – 04/23/2020): Bloomberg Barclays US TIPS TR Index
9. Morningstar (data from 3/23/2020 – 04/23/2020): Bloomberg Sub Gold TR Index
10. Yahoo! Finance (data as of 4/23/20) – S&P 500

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L) measures the performance of the US Treasury Inflation Protected Securities (TIPS) market. Federal Reserve holdings of US TIPS are not index eligible and are excluded from the face amount outstanding of each bond in the index.

Formerly known as Dow Jones-UBS Gold Subindex Total Return (DJUBGCTR), the Bloomberg Gold Subindex Total Return Index reflects the return on fully collateralized future positions.


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