Interest rates

The eternal zero

The pandemic will leave a legacy of even lower interest rates—and even higher asset prices

FOR FINANCIAL markets the 2010s were a time when it was hard to tell good news from bad. Even as the world laboured to shake off the financial crisis, the prices of stocks and bonds—not to mention houses—kept climbing. But good news, such as wage growth picking up, could cause markets to wobble. The reason was uncertainty over how far growth would go before central banks, especially the Federal Reserve, raised interest rates. Anything presaging monetary tightening caused bearishness. In the link between economy and markets, monetary policy was a signal dampener.

When covid-19 struck, there was no such ambiguity. Global stockmarkets tanked in March. For a time even American Treasury bonds, the world’s safest asset, fell in price amid a scramble for cash and dysfunctional money markets. But eventually the signal dampener kicked in. The Fed cut interest rates and unleashed a torrent of liquidity to keep dollar markets functioning, preventing a credit crunch, mass bankruptcies and lay-offs. Other central banks followed suit. Since January central banks in America, Britain, Japan and the euro area have created new money worth $3.8trn, much of which has kept yields on long-term government debt close to zero.

Markets were not just calmed: they began a bull run that defied gloomy forecasts. Between the start of April and the end of August, with central banks pinning bond yields down,…