HedgeTalk: Pandemics Cause Lower Interest Rates, Said the San Fran Fed!


By: Johan Rosenberg, Chairman

In a San Francisco Federal Reserve (“San Francisco Fed”) report, an economist, Òscar Jordà, studied the medium to long-term effects of major pandemics during the past 500 years. See study here https://www.frbsf.org/economic-research/files/wp2020-09.pdf


One major finding was pandemics’ impact on interest rates:


“Pandemics have effects that last for decades. Following a pandemic, the natural rate of interest declines for years thereafter, reaching its nadir about 20 years later, with the natural rate about 150 bps lower had the pandemic not taken place. At about four decades later, the natural rate returns to the level it would be expected to have had if the pandemic had not taken place.”

When will the pandemic end? The answer to this question is anyone’s guess, but I will offer some food for thought:


  • Negative interest rates cannot be ruled out.

  • At the beginning of the pandemic, the 30YR Treasury was around 70 basis points and at the time of this writing, near-term treasury yields are hovering below 15 basis points.

  • We will come out of this pandemic with trillions more in public debt.

  • This could be inflationary and usher in years of significant demand destruction from secular changes in behavior.


Our company, for example, cannot imagine the pandemic effect to subside until Spring of 2022 at the earliest, and the improvement in lifestyle due to working from home has drastically reduced our need for office space and travel.


All of this solidifies my conviction that gold is a great hedge against the instability resulting from deflation or rampant inflation. If interest rates go lower, either negative or historically low as the San Francisco Fed report finds, it makes the opportunity cost of holding gold at effectively zero. If there is inflation, gold appreciates in lockstep.

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