PIMCO, New Normal, Neutral Policy Rate

PIMCO | Investment Outlook - Achoo!: "New Normal " " . . . approximations of a neutral policy rate in a New Normal economy burdened by high debt leverage and other structural headwinds such as globalization, aging demographic influences, and technology. But I suspect these estimates which average less than 2%, are much closer to financial reality than the average, 4% “blue dot” estimates of Fed “participants,” dismissed somewhat by Fed Chair Janet Yellen herself last month. Why is this academic “Fed Fight” important to markets? Well, if a bond investor knew whether 4% or 2% was the long term neutral policy rate, he/she would literally have the key to the kingdom. Forward markets now anticipate a 4% nominal policy rate sometime out in 2020. If the neutral policy rate was 2% instead of 4% then bonds instead of being artificially priced, would be attractively priced. Instead of facing a nearly 100% certain bear market currently forecast by market mavens, bond investors could draw some comfort from a low returning yet less volatile future. Bonds would shed the “certificates of confiscation” label for yet another decade or so, as this 2% neutral policy rate delevered the economy without igniting inflationary fears...."

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