Here are the critical paragraphs:
But I wax philosophical and not financial. My/our most certain idea, as expressed in previous Outlooks, is that real interest rates in the United States will have to be kept low, that the old Taylor rule is out. Too much debt in a finance-based economy precludes raising interest rates like we have in the past and while that keeps the patient/economy breathing; it leads to asset bubbles, potential inflation, and a declining currency over time.
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While currencies are not my specialties, bonds are, and I have a few more specific thoughts on TIPS and the yield curve in particular, especially in reference to the thing I’m most certain of – low short rates. The low rates I speak to are really low real short-term rates. If inflation continues upwards it would be logical for the Fed to raise nominal short rates just enough to contain prices, but not kill the economy. We have suggested ½% real as a future Fed target, but no one really knows – we will all just have to find out. With so much debt in our economy as seen in Chart I, a subjective analysis would caution against raising real rates too high, and so far the Fed seems to agree. Fed governor Janet Yellen in an October 21st speech made a distinction between the “long-run equilibrium real rate” (Taylor rule) and the “intermediate equilibrium real rate,” stating that factors such as oil prices, investment spending, job growth and consumption – in other words the economy – must improve before we can safely raise real rates back to recent decade norms. PIMCO believes that will be a long time coming.
Gross has aligned himself with my expectations more or less.
The FED simply can not hike as much as is expected (warranted?)
pimco.com |
