Expect low interest rates, moderate GDP growth & yields in 2015

The labor Force growth rate over the next 25 years, he said, will be 50 to 100 basis points less than during the post-World War II war period. Nominal GDP growth is likely also to be 300 to 400 basis points below that enjoyed during the post-war years.

The slow-to-moderate growth sentiment is mirrored in QMA's "2015 Outlook and Review," which pegs GDP growth rates for the U.S. and Europe at 3.1 percent and 1.3 percent, respectively, in 2015. This compares with 2.2 percent and 1.3 percent in 2014.

Interest rate trends

Michael Lillard, managing director and chief investment officer of Prudential Fixed Income, said the long-term Federal Funds rate — the interest rate at which banks trade balances held at the Federal Reserve — will remain in the 1 to 2 percent range. Helping to keep the rate at a historically low level is a comparably low growth rate in gross domestic product, which Prudential pegs at about 2 percent for 2015.

Guiding Fed policy in part on interest rates are prices of goods and services. Inflation could force a tightening of monetary policy (and, hence, a rise in interest rates). A deflationary spiral, which the panelists believe to be less likely in the U.S., could spur a further loosening of the money supply.

Of the two threats, the latter is the greater of the two, according to Prudential Financial Chief Investment Strategist John Praveen.

"One you go down a slippery [deflationary] slope, it's very difficult to come out of it," said Praveen. "It's much easier to fight inflation than deflation."

In Prudential International Investment Advisors' January 2015 "Global Economic Outlook," a brief distributed at the gathering, Praveen forecasts that inflation will "remain low" this year in both developed and emerging economies. A key reason: weak oil and commodity prices, which are expected to offset inflation-inducing GDP growth.

The low inflation, Praveen adds in the report, will likely prompt the European Central Bank and the Bank of Japan to pursue "quantitative easing" policies (i.e., buying government bonds or other securities so as to reduce interest rates and boost the money supply.)

The first quarter 2015 Outlook & Review of QMA's Asset Allocation Group echoes Praveen's  forecast, noting also that the anticipated ECB and JOB actions stand in contrast to policies of the Fed and Bank of England, which QMA expects will "exit their zero interest rate policies" this year.

Might an economic crisis or government action in emerging markets, such as the recent move by Russia's central bank to boost interest rates to counteract the precipitous slide in the ruble, upset monetary policy in the U.S.?  Prudential's Lillard rejected this possibility.

"The rate increase by Russia's central bank could impact the timing of an interest rate increase by the Federal Reserve," said Lillard. "But the Fed's focus will remain on the impact of a rate hike on the U.S. economy." 

QMA's Keon agreed, adding that interest rates in the U.S. are likely to remain low because of the "the tremendous amount of money" that risk-averse investors are pouring into U.S. securities and fixed income vehicles, most notably U.S. Treasuries.

As to bank practices, Prudential's Lillard noted that, due to the current regulatory regime, including the imposition of heighted risk-based capital standards requirements, financial institutions are less able today to buy risky assets with bank deposits. Upshot: Don't expect to see aggressive bank lending, such as that which caused the U.S. economy to overheat during 2007-2009 financial crisis.