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Normalized interest rates aren't normal

The authors of Duff & Phelps Valuation Handbook believe that today's interest rates are too low. They are artificially suppressed by the Federal Reserve and the usage of quantitative easing. One question I have is: when has the Federal Reserve not affected the level of interest rates? That is a primary function of theirs in fulfilling their objectives of low inflation and full employment.


There is no theoretical basis for "normalizing" interest rates. Investors make choices based on what is available in the market. Portfolio theory rests on risk-free rates and riskier investments and investors optimizing their holdings to maximize return and control risk to a tolerable level. Nowhere in my studies was there an assertion that if rates were too low then just assume they will get higher sometime in the future.


For over 10 years Duff and Phelps have been pushing this myth. For 10 years, valuation analysts who have followed their guidance have been underestimating the value of companies. For 10 years they have been both theoretically and measurably wrong. Maybe a change in approach is due?

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