Billionaire Investor Howard Marks Says US Hasn't Had A Free Market In Decades Due Federal Reserve's 'Activist' Approach, Warning That 'Easy Money Corrupts'

Renowned investor Howard Marks, who co-founded Oaktree Capital, has raised concerns that a return to the low-interest rate environment, which was seen between the Great Financial Crisis and the outbreak of the pandemic, could foster detrimental investment behavior.

What Happened: In a Tuesday memo, Marks stated that the natural rate, which reflects the balance of supply and demand for money without central bank interference, ought to guide capital allocation decisions. He, however, pointed out that the financial market has not operated freely since the 90s due to the Federal Reserve’s ‘activist’ approach, which involves pumping liquidity to avert potential problems, reported Business Insider.

With inflation dropping, investors expect the Federal Reserve to slash interest rates again, which would impact both the equity and bond markets. Despite this, Marks warned against expecting near-zero rates, underlining the problems that arose from the easy-money era before the pandemic.

“Maybe we have a new version of Lord Acton’s law: easy money corrupts, and really easy money corrupts absolutely,” Marks wrote, quoting the late investor Charlie Munger from an interaction the two shared.

Marks explained that while lower borrowing costs can spur economic growth, they can also accelerate growth too quickly, leading to inflation. This, in turn, would prompt the Fed to implement a stricter policy, which could discourage economic activity and create financial mismatches.

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Low rates also have the potential to inflate asset prices and encourage riskier investments, possibly leading to asset bubbles. Moreover, people who do not invest in stocks earn less on their savings, exacerbating wealth inequality.

Why It Matters: This warning from Marks comes at a time when the Federal Reserve’s monetary policy has been a hot topic of discussion. Last year in November, Peter Schiff criticized Fed Chair Jerome Powell’s inflation outlook, emphasizing the role of excessive government spending in driving inflation above the Fed’s 2% target.

Wall Street banks had to recalibrate their 2024 interest rate forecasts following a dovish pivot from the Fed, indicating potential rate cuts. This was further confirmed by the Fed’s December meeting minutes, which suggested that interest rates are likely at or near the peak of the cycle. The minutes reflect an uneven progression in inflation control, particularly noting that "core services prices are still rising at an elevated pace."

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