Grantham Calls Fed's Low Interest Rates `Large Negative' to U.S. Economy

Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said the Federal Reserve’s policy of low interest rates has harmed the U.S. economy and if the central bank goes ahead with quantitative easing it could make the situation worse.

“Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low-rate policy,” Grantham wrote today in his quarterly newsletter posted on Boston-based GMO’s website.

Low rates encourage speculation, increase inflation fears and drive down the value of the dollar, Grantham said. He called Fed policy “a large net negative to the production of a healthy stable economy with strong employment.”

The Fed has held its main lending rate close to zero since December 2008. Under quantitative easing the Fed would purchase Treasuries to flood markets with cheap money in a bid to keep the economic recovery on track. The central bank meets Nov. 2-3.

The 72-year-old Grantham, long known for his bearish investment outlook, said U.S. stocks were overvalued. He didn’t provide an estimate of where they should be trading in his letter. He said there was a 50 percent chance the Standard & Poor’s 500 Index could reach 1,400 or 1,500 within a year if speculation takes hold.

The index closed at 1,185.64, up 6.3 percent in 2010.

Grantham continues to favor high-quality U.S. stocks, companies defined by stable earnings and low debt. GMO expects large-cap U.S. stocks to return 1.7 percent a year above the inflation rate for the next seven years, compared with a real return of 5.7 percent a year over the same stretch for high- quality stocks, according to the website.

In 2000, Grantham accurately predicted that U.S. stocks would lose money in the coming decade. The S&P 500 lost an average of 1 percent a year in the 10 years ended Dec. 31, 2009.

GMO managed more than $94 billion as of June 30, the company said on its website.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor on this story: Christian Baumgaertel in Boston at cbaumgaertel@bloomberg.net

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