Paul McCulley and Saumil Parikh make the case for the Fed’s transparency, arguing that both the US and the world economies have benefited as a consequence of this openness. Although I intuitively agree with them, I don’t think their low interest rate charts help to prove their point, viewed against the backdrop of the Chinese exported deflation of the last 20 years or so…
I think the article’s utter importance rests elsewhere: according to recent Fed estimates, based on population growth, participation and productivity growth, aging will trim 1 % from potential US GDP growth during the following 10 years… Since populations from Europe, Japan and China are also rapidly heading in the same direction, this contraction could easily be extrapolated to world growth forecasts.
And this newly acquired Fed knowledge, could very well mean that they have… overshot their Fed funds rate… or applied the brakes too hard by raising their target rate too high. If this is true, then the Fed should ease their rates soon enough… According to Paul and Saumil:
To marry the concepts of an already restrictive real federal funds rate,
given “new information” on potential GDP, to the observed reflexive
nature of the ongoing recession in residential real estate (which, is
leading overall GDP growth lower over PIMCO’s cyclical horizon), almost
instantaneously yields a call for easier monetary policy in the
not-so-distant future. This is what cyclical forecasting is all about –
we must focus on understanding the source of cyclical output gaps and
separate it from the by-products of the same cyclical output gaps, to
arrive at a clear picture of future real interest rate expectations
In conclusion, the prospect of lower interest rates is reinforced by this new "information", seated on the inescapable truth of us all growing old… and living longer.
Click to listen: Will you still love me when I’m 64? The Beatles
The real question is then: Is this the straw that will break the camel’s back, or… will the US economy crumble under the weight of this new twist of Fed overshooting?